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ZPG & ASSOCIATES (Zambales.Pablo.

Gonzales)
ACT NO. 2031 February 03, 1911 THE NEGOTIABLE INSTRUMENTS LAW I. FORM AND INTERPRETATION Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. written on a blackboard is not negotiable). In signing, the maker thereby binds himself to be liable for the note (Sec. 18) It may be the makers full name or his surname only or signature. It may be in initials or numbers. But , where the name is not signed, the holder must prove that what is written is intended as the signature of the person sought to be charged. In fact, for as long as it be shown that such was adopted and used by the maker as his signature, it is sufficient. (Note: he who makes it possible for the commission of fraud, bears the loss). What is meant by an unconditional promise/order to pay a sum certain in money? The promise to pay must be on the note itself although it is not necessary to use the word promise. It is enough that 1. equivalent words be used such as agree, will pay, shall pay; or that 2. words implying a promise are contained in the instrument such as Good to or payable on demand (e.g. Good to X or order P10.) Mere acknowledgement of a debt is not enough but an acknowledgment followed by the phrase to be paid implies a promise to pay. ( I acknowledge a debt of P10 to be paid on demand) Further, an instrument which stated Due X or order on demand P10 is negotiable because to be paid though not stated, is required by the sense of the statement. Similarly, it is not necessary that the word order be used. Equivalent words or those which show the drawer will that the money should be paid are sufficient. All that must be remembered is that the BOE is more than mere asking of a favor and that it is an instrument demanding a right. Thus, a mere requests to pay or mere authorization to ay is not enough to render it negotiable for it gives a discretion whether or not to pay. To be unconditional or absolute, the order or promise to pay must not be subject to a condition ( a contingent event). If the event is certain to happen, it is not contingent nor is it a condition. Under Art. 1179 of the NCC, a condition is a (1) future and uncertain event; or (2) a past event unknown to the parties (See also Sec. 3 for further meaning). The amount of money to be paid must be determinable (at the time of issue) by inspection and must be stated plainly on the face of the instrument. The sum is certain even is mathematical computation is still needed because the amount to be paid is still ascertainable from the instrument alone without reference to any outside source. (see also Sec. 2). The payment must be for a sum of money . To be negotiable, the bill or note must not be payable in goods, wares, property or service nor in bonds, stocks, checks or foreign bills. The reason for the requirement is that money is the one standard of value in actual business. Exception to this rule is Sec. 5d. an instrument payable in money or goods, services et. at the option of the holder. Further, while R.A. 529 requires that the discharge of obligations be in legal tender of the Philippines the instruments negotiability and

What are the requisites for a negotiable note? A Promissory note, to be negotiable , must conform to the following requirements: 1. it must be in writing and signed by the maker; 2. Must contain an unconditional promise to pay a sum certain in money 3. must be payable on demand or at a fixed or determinable future time 4. must be payable to order or bearer What are the requisites of a negotiable bill? A bill of exchange, to be negotiable, must conform to the following requirements: 1. in writing and signed by the drawer 2. contain an unconditional; order to pay a sum certain in money 3. payable on demand or at a fixed or determinable future time 4. payable to order or bearer 5. the drawee must be named or otherwise indicated therein with reasonable certainty

What is meant by in writing and signed by the maker or drawer? The instrument must in writing for if it were not there would be nothing to be negotiated or passed from hand to hand. The medium in which it is written and where it is written is not important. It may be in ink, print or pencil. It may be in parchment, cloth, leather or any other substitute of paper. What is important is it is in writing and such writing is capable of being transferred or negotiated. (e.g. A note

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validity are not affected by the fact that another currency is stipulated (Sec. 6e) In such case, the indemnity to be allowed should be expressed in Phil. Currency on the basis of the current rate of exchange at the time of payment. But, to be negotiable, the instrument must state the denomination in which it is to be payable. When is an instrument payable on demand? In accordance with Sec. 7, a note is payable on demand: 1. 2. 3. When it is so expressed to be payable on demand or at sight or on presentation; when no time for payment is expressed; when an instrument is issued, accepted or indorsed when overdue- as to the party so issuing, accepting or indorsing, it is payable on demand. It is sufficient that the name of the person on whom a bill is drawn should appear on the face of the instrument. Otherwise, the instrument would not be negotiable. But, under Sec. 14, the drawees name may be omitted and be filled in under implied authority like any other blank. (REMEMBER: Sec. 14 refers to the incomplete but delivered instruments and that the authority to fill up should be in strict accordance with the authority given). Also, an acceptance by the drawee may supply the omission of a designation and renders said instrument negotiable. Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid: 1. with interest; or 2. by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity. What is the rule regarding the sum payable being definite and certain? Since a NI is a device intended to take the place of money, it is therefore essential that it represents a fixed amount of money. The amount of money must be determinable by inspection and must be stated plainly on the face/ body of the instrument. When can it be said that the sum is certain despite the stipulation of interest? A stipulation of interest does not render the sum to be paid as uncertain because given the interest rate, the amount due can be easily computed. Provided the principal sum is certain, the amount due becomes a matter of mathematical computation ascertainable from the face of the instrument alone. Further, where interest is stipulated but not specified (as to rate), the note is still negotiable and the rate is to be understood to be the legal rate which is 12% for loans or forbearance of money. What is an escalation clause? A de-escalation clause? An escalation clause is a stipulation in an agreement pertaining to a loan or forbearance of money, goods or credits providing that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest, is increased by law or by the Monetary Board. Deescalation clause is stipulation in the agreement that the rate of interest agreed upon shall be reduced if the maximum rate -3-

When is an instrument payable at a fixed or determinable future time? It is payable at a fixed time when a date is specified. But where the date is given as Dec. 2, it is not fixed because the time of payment is not determinable as the year is not given. In accordance with Sec. 4, an instrument is payable at a determinable future time when it is expressed to be payable1. at a fixed period after date or sight; or 2. on or before a fixed or determinable future time specified therein; or 3. on or at a fixed period after the occurrence of a specified event which is certain to happen though the time of happening be uncertain. When is an instrument payable to order? To bearer? In accordance with Sec. 9b, an instrument is payable to bearer when 1. it is expressed to be so payable; 2. it is payable to a specified person or bearer; 3. it is payable to the order of a fictitious or nonexisting person and this fact is known to the maker or drawer; 4. when the name of the payee does not purport to be the name of any person; 5. when the only or last indorsement is an indorsement in blank It is not important that the words order or bearer be used. It is sufficient that words of similar import are put in its place. (e.g. Pay to B or assigns or assignees or holder or possessor). A note payable to the order or bearer is payable to order and such instrument may be negotiated only by bearers indorsement. (The bearer is the payee.) When is the indication of the drawees name sufficient?

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of interest is decreased by law or by the Monetary Board. The escalation clause is valid if there is also a de-escalation clause in the agreement. What are the requirements as regards payment of installments? 1. The amount of installment must be stated (the sum payable for each installment must not be uncertain. It can be ascertainable.) The maturity date of each installment must be fixed or determinable. compensation for the loan than the law allows, but to safeguard the lender against future loss or damage by being compelled to retain counsel to institute judicial proceedings to collect his debt. The provision refers only to reasonable attorneys fees.

What is the effect of negotiable after the note is overdue?

2.

What is the rule on acceleration clause? An instrument, which is to be paid in, stated installment is not rendered non-negotiable despite a provision that upon default of any installment or of interest, the whole amount shall become due. Such is called an acceleration clause because it hastens the payment of the whole note. The failure to pay any installment renders the balance of the amount immediately due and demandable. An acceleration clause does not make the instrument payable upon a contingency (thus, non-negotiable) since payment is surely to be made and its time of payment is surely come. In a sense, it is deemed to be payable on or before a fixed or determinable future time specified therein (sec.4b) What is the rule on provisions for exchange? Exchange is defined to be the difference in value of the same amount of money in different countries. The exchange may be at the (1) current rate, or at a (2) fixed rate indicated therein. Such provision does not render the instrument nonnegotiable because while the rate of exchange is not always the same and while it is technically true that resort must be had to extrinsic evidence to ascertain what it is, yet the current rate of exchange between 2 places at a particular date is a matter of common commercial knowledge, or at least easily ascertained by any one so that the parties can always, without difficulty, ascertain the exact amount necessary to discharge the paper. It must be remembered that this provision applies only to instruments drawn in one country and payable in another. Where an instrument is drawn in one country and payable in the same country, there can be no exchange, so a provision for payment of exchange may be disregarded. Why doesnt a stipulation for attorneys fees render the sum uncertain? Although such a stipulation will make the sum payable after maturity uncertain, it will not affect the certainty of the sum payable at maturity and, therefore will not affect the negotiability of the instrument in which it is stipulated. The purpose of the stipulation is not to give the lender a larger -4-

After the date of maturity, the instrument will no longer be negotiable in the full commercial sense, that is, in the sense that any transferee acquiring it would not be a holder in due course, as he acquire the instrument after it is overdue. Since the transferee would not be a holder in due course (HIDC), he would hold the instrument subject to the defenses as if it were non-negotiable.

Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. What are the difference between par A. and the last par. of sec 3.?

In the first case, the particular fund indicated is not the direct source of payment. It is only the source of reimbursement. The payment of the instrument is not made subject to the condition of availability or sufficiency of funds in the said account. Here, the drawee first pays the payee from his own funds, then, afterwards, the drawee pays himself from the funds indicated. The order or promise to pay is upon the general credit of the drawer or the maker. In the second case, the particular fund indicated is the direct source of payment. Here, there is only one act, which is that the drawee pays directly from the fund indicated. The payment is, thus, subject to the condition that the funds indicated are sufficient. But the funds indicated may or may not be sufficient so that the instrument is rendered non-negotiable because payment is conditional. Eg. 1 case- pays to B or order P10 and reimburses yourself out of the money in your hands. 2 case- pays to B or order P10 out of my part of the estate.
nd st

ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)


But, where the sum payable is to be paid out of a particular fund yet payment is not restricted to such fund alone, negotiability is not destroyed. Eg. Pay to B or order P10 out of the monthly rental due from A and secured to be paid by my BPI account. Similarly, where the instrument indicates a particular account to be debited with the amount, the instrument remains unconditional and negotiable. The instrument, in this case, is to be first paid and afterwards, the particular account will be debited. The payment is not subject to the sufficiency of account to be debited. Eg. Pay to B or order P10 and charge the same to my account. After sight means after the drawee has seen the instrument upon presentments doe acceptance. The instrument becomes payable after a fixed period subsequent to date of presentment to the drawee.

What is the rule on the occurrence of a specified events?

What is a statement of transaction?

Instruments are not issued without any transaction upon which they are based. The statement of transaction is the reason giving rise to the issuance of the instrument and the mere fact that it. Is stated in the instrument will not make the promise or order conditional. Eg. Pay to B or order P10 for payment of a debt. But where the promise or order is made subject to the terms and conditions of the transaction stated, then the instrument is rendered non-negotiable. Besides would be contrary to the rule that the negotiability of an instrument (whether there is an un-conditional order or promise) must be determined only from the document itself and not elsewhere. Eg. I promise to pay B or order P10 subject to the terms contained in the contract between A & C. Normally, an instruments negotiability is not affected by the fact that it is secured by a mortgage. But, where such provision become in the note will render the amount uncertain or where such provisions become part of the note, even though they are not in the note itself, the instrument is rendered non-negotiable. Thus, where the note is not only secured by a mortgage but also made subject to its provisions, the note is nonnegotiable.

It is essential that the specified event must be certain to happen although the time of happening is uncertain. If the event specified is not certain to happen, then it is a condition and the instrument would be rendered non-negotiable, it is payable upon a contingency and, according to the law, the happening of the contingency or condition does not cure the defect.

When an instrument states, I promise to pay X or order P1000, 10 days after Ys death. Sgd.z. is this instrument negotiable and why?

The instrument is negotiable because payment is still certain to be made (unconditionally), i.e. Ys death will surely happen.

But if in the previous example, Z promises to pay 10 days before the death of Y, would such instrument be negotiable?

No, because the maturity is uncertain (as no one can tell exactly when another person will die). Further, when Y is already dead, the instrument will already be over due and will not be negotiable in its full commercial sense.

Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. What does at a fixed period after sight mean?

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money.

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But nothing in this section shall validate any provision or stipulation otherwise illegal. What is the general rule as regards the requirement of additional acts contained in an instrument? valid (because it is illegal) by virtue of the last par. of sec.5, the instrument is never the less negotiable. (c). Waives the benefit of any law intended for the advantage or protection of the obligator- such as the rights to (1) presentment for payment (sec.70); (2) notice of honor (sec.110); (3) protest (sec.111). These being rights, they may be waived unless the waiver be contrary to law, public policy, etc. (art.6 of NCC.)

The general rule is that an instrument must not contain an order or promise to do any act in addition to payment of money. Otherwise the instrument would be rendered nonnegotiable. But the rest of negotiability is whether or not the promise to do any additional act would give rise to a cause of action for breach of contract if the said act is not done, if it does, the instrument is rendered non-negotiable. Eg. I promise to pay X or order P1000 and 1 horse. Such is nonnegotiable because it contains an additional act to be performed aside from payment of money. Eg. . I promise to pay X or order P1000 and a horse. Such is also non-negotiable because the choice to pay money or deliver the horse is at the option of the debtor. But, if the phrase at the option of X is added to the instrument, such is negotiable because the option lies with the holder rendering the sum payable still certain.

(d) Gives the holder an election to require something other than money- even if there is an additional act, the instrument still remains negotiable provided that the right to choose is in the hands of the holder.

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. What is the rule on payment in other currencies (par. e)?

What are the exceptions to the general rule?

The negotiable character of an instrument otherwise negotiable is not affected by a provision which1. Authorizes the sale of collateral securities in case of failure to pay- the additional act to be performed is to be executed after the date of maturity. Before the date of maturity, no additional act is to be performed except the payment of money. Eg. I promise to pay X or order P100 on the December 31,1950 provided that if I fail to do so, X may sell the rin I delivered to secure payment of the note. Sgd. A. Authorizes a confession of judgment if the instrument be not paid- the additional act is to be performed after the date of maturity when the instrument ceases to be negotiable in its full commercial sense. A power of attorney to confess judgment anytime before maturity renders a note non-negotiable. Further, in the Philippines, confessions of judgment have been declared void as against public policy because

2.

Even if the money in which the instrument is to be payable is not legal tender, provided is current money or foreign money which has a fixed value in relation to the money of the country in which the instrument is payable, the negotiability of the instrument is not affected, as it is still considered payable in money.

a.

They enlarge the field for fraud. 2. Promissor bargains away his day in court and the effect of the instrument is to strike down the right of appeal accorded by the statute. But while the provision as to confession of judgment is not rendered -6-

Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed.

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Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Give example of the above. (b) (c) (d) (e) (f) The drawer or maker; or The drawee; or Two or more payees jointly; or One or some of several payees; or The holder of an office for the time being.

Ex. 1) of when it is expressed to be payable on demand I promise to pay on demand P 1,000 to X or bearer. Sgd. A.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. What does payable to order mean?

-- Instead of on demand the words on sight or on presentation may be used. The words at sight are not ordinarily used in promissory notes.

2) Of when no time for payment is expressed Pay to X or order P1, 000 to Y. sgd. Z.

-- Where the instrument contains a blank space for the date but no date is indicated, it has been held to be payable on demand. However, it may be properly considered as an incomplete instrument and may fall under the provisions if sec.14 or 15 depending upon how it was delivered (or not).

In BOE, it means that the drawee orders the drawee to pay the payee indicated or if not him, to anybody designated by him. Such designation is made by indorsement of the payee. In PN, the maker promises to pay the payee indicated or if not him, to anybody designated by him through (also) indorsement. It does not mean that a bill is necessarily payable to order because it contains an unconditional order to pay. A BOE may either be payable to order or to bearer. Similarly, a PN may also be payable to order or bearer.

What is the rule on naming the payee?

3.

Of the last par. a. as regards the person so issuing A note dated July 30, 1984 and payable 30 days after date is issued on August 4,1984. b. as regards the person so accepting A bill payable on August 20,1984 is accepted by the drawee on August 21,1984. c. as regards the indorser A note payable 30 days after August 1, 1984 is indorsed on September 2,1984.

The law requires that the payee must be named or otherwise indicated with reasonable certainty. The payee of an instrument payable to order must be a person in being, natural or legal, and ascertained at the time of issue. If there is no payee indicated, no one could indorse the instrument. Consequently, it is useless to consider it as negotiable.

NOTES: 1) Where the instrument is payable to the order of the drawer and it is acceptable by the drawee, the instrument is equivalent to a promissory note by the acceptor in favor if the drawer. 2) Being joint payees is indicated by the conjunction and. Eg. I promise to pay A and B or order P100. sgd. X. 3) Being solidary payees is indicated by the conjunction or. Eg. I promise to pay to the order of A or B P100. sgd. X. 4) Example of par. f Pay to the order of Cashier of U.P. P10.

-- After the date of maturity, the instrument can no longer be negotiated as to make the partios who acquire the instrument after the date of maturity holders in sue course because they become holders thereof with notice that it is already overdue, as it can be determined from the face of the instrument itself. It is payable in demand only as between the immediate parties.

Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or -7-

Is the following instrument payable to order: Pay to the order of Ms. Laya P100. sgd. Coach.?

ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)


Yes, because the instrument is payable to the order of a specified person or to him or his order. drawer or maker never intended for it to be payable to the said person. The want of interest in the payee is not the controlling consideration in determining whether an instrument is payable to bearer, as payable to a fictitious person. Rather, it is the intention the maker or drawer not to make said person the payee. Thus, it does not matter whether the name of the payee used by the drawer or maker be that of one living or dead or one who never existed. The name is fictitious when it is feigned or pretended and a nonexistent person is one who does not exist in the sense that he was not intended to be payee by the drawer. Thus, an instrument made payable to the order of non-existing person or of a person having no interest in the transaction where the makers believes that such person exist and has an interest in the transaction and intends that he shall receive the same, is not payable to a fictitious person or to bearer. Only if such maker, knowing the person to be non-existing, never intended it to be paid to the designated person, can the instrument be payable to a fictitious person or to a bearer.

When can an instrument originally payable to order become one payable to bearer?

Under sec.98, when the only or last indorsement is an indorsement in blank.

What is the rule re: the conversion of order noted to bearer notes?

The rule is once a bearer instrument, always a bearer instrument. This rule refers to instruments originally payable to bearer. But an order instrument may be converted to a bearer instrument by blank endorsement of the payee or last endorsee. It may again be converted to an order instrument, by virtue of sec. 35, by writing over the signature in blank any contract not inconsistent with the character of the endorsement. Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank. What is the rule re: fictitious or non-existing persons?

NOTES: 1) Under the NIL, a check drawn payable to the order of cash is a check payable to bearer., and the bank may pay it to the person presenting it for payment without the drawers endorsement. 2) In sec.9e, the instrument contemplated is one originally payable to order. It becomes payable to bearer where: (a) there is only one endorsement and such is in blank: or (b) there are several endorsement but the last one is in blank. But, a blank endorsement cannot make a non-negotiable instrument (because payable to a specified person) negotiable. The word indorsement refers only to negotiable instruments. Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. NOTES: It is advisable to use the words of the law in order to avoid uncertainty. However, under Sec. 10, it is not necessary to use the exact words of the law. The substance of the transaction rather than the form is the criterion for the negotiability. Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. NOTES: Sec, 11 applies to 3 cases: (1) the instrument contains the date of issue, in which case it is presumed to be the true date of making or drawing; (2) in an accepted bill of exchange, the acceptance is dated; in which case it is -8-

This provision has 2 requisites: (1) the payee named must be fictitious or non-existent; and (2) the one making the instrument so payable must know him to be fictitious or nonexisting. The first requisite must be qualified. The words fictitious person are not limited to persons having no real existence. An existing person may be considered a fictitious payee, depending upon the intention of the one making or drawing the instrument. Fictitious person means never intended who has no right to the instrument because the

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presumed to bethe true date of acceptance; (3) an instrument is indorsed and the indorsement is dated, in which case it is presumed to be the true date of indsorsement. But all such presumptions may be rebutted by competent proof to the contrary. The burden of proving belongs to the persons who disputes the veracity of the dates indicated. No. sioson can just fill in the true date of issues in order to determine the date of maturity. But, the instruments negotiability is not affected in accordance with sec. 6. In the same example, suppose Sioson puts a false date on the instrument and negotiates it to Lyn, an innocent party. What are the effects? The date Sioson inserted is void, but as to Lyn, she can enforce it against Rhoda as the performer is a subsequent holder in due course. Remember the rule is that between 2 innocents, the one who made possible the commission of the wrong bears the loss. Also, as to Sioson, the instrument becomes void. This being in accordance with this section as well as with sec. 12, that ante or post dating (which ever case) for fraudulent purposes renders the instrument void.

Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. What is the rule on ante-dating and post-dating? Sec. 12 contemplates ante-dating or post dating where the parties have mutually agreed to such dating. An instrument is post-dated when the date written thereon is later than the true date of its issuance or delivery. An instrument is ante- dated when the date written thereon is earlier than the true date of its issuance or delivery. The general rule on such instrument is that an ante-dated or postdated instrument is not rendered invalid or non-negotiable by that fact alone. It may be negotiated before or after the date given as long as it is not negotiated after its maturity. The only limitation is that the ante-dating or post-dating is not done for illegal and fraudulent purposes. Further, title to the instrument is not acquired as of the date written on the instrument but rather as of the actual date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Is the date necessary to an instrument? Under Sec. 6, the date is not necessary for the negotiability of the instrument. However, the date may be necessary; (1) where an instrument is payable at a fixed period after date but is issued updated; and (2) where an instrument is payable at a fixed period after sight but the acceptance is updated. In these 2 cases, any holder may insert the true date of issue or acceptance. Rhoda issues an undated instrument to Sioson, does the fact that is undated affect is negotiability?

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. What are the 2 steps in execution of NI? The mechanical act of writing the instrument completely and in accordance with sec. 1, of NI; and The delivery of the instrument with the intention of giving effect to it.

To what step does sec. 14 refer? Sec. 14 refers to instrument that are not complete on its face but delivered by the maker/drawer. It applies to cases where the instrument is incomplete but delivered. The first step is, thus, not fully satisfied. What are the 2 cases referred to in sec. 14? What are the rules on each case? 1. PRIMA FACIE AUTHORITY TO FILL UP BLANKS-

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Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up to the blanks therein. a. Material particular- may either be a particular the omission of which will render the instrument non-negotiable Eg. Of (a) name of payee, of the drawer Of (b) date, rate of interest, place of payment any particular proper to be inserted in a negotiable instrument to make it complete (given the circumstances of the instrument) o GIVEN 2 FACTS: (1) there is want of material particular in the instrument; and (2) there is possession by a person other than the drawer or maker THEN- the law presumes agency or authority to fill up the blanks. 2 PRIMA FACIE AUTHORITIES TO FILL UP TO ANY AMOUNTA signature in a blank paper delivered by a person making the signature in order that the proper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. GIVEN 2 FACTS: (1) A signature in a blank paper, and (2) the paper is delivered with the intention of having converted into a NI (mere possession not being enough) THEN- the law presumes authority to fill up to any amount. But, to hold PRIOR (before completion) parties liable To a person filling up and to holder not a HIDC- (1) the blank must be filled up strictly in accordance with the authority given and (2) filled up within a reasonable time. (Reasonable time depends on the nature of the instrument, the usage of the trade or business and the facts of a particular case sec. 193.) so much so that lack of one of the two would result in a failure to enforce the instrument against said parties. To a holder who is a HIDC- it is necessary that either was followed for being a HIDG, he takes the note (sec. 52) o o o o Complete and regular on its face; Before it was overdue and without notice or dishonor In good faith and value Without notice of infirmity in the instrument or defect in the title of the owner. The maker or drawer cannot blame an innocent party for a mistake which he himself made possible (for not completing the notice). THUS, failure to fill up strictly in accordance with authority given and within a reasonable time is- a personal defense. This is so because it is available as a defense only as against those holders not HIDC (including the person filling up). The maker or drawer is not liable to them. But, as to HIDC, it is not a valid defense. The maker is still liable despite the error. WITH REGARD TO PARTIES AFTER FILLING UP, they are estopped or precluded from claiming that the notice was not filled up strictly in accordance with the authority given. As to them, they negotiate the instrument for the value filled up strictly. Suppose: Toby executed a note I promise to pay Erwin or order-------. Sdg. Toby then gave Erwin the note authorizing him to place any amount not exceeding P5, 000. But Erwin placed P10, 000 and negotiated it to Ian. Can Ian go against Erwin? Can Ian go against Toby? As to Erwin, being a party to the completion and having negotiated the note for such value, Erwin, regardless of whether Ian is a HIDC or not, can be held liable for the value. As to Toby, if Ian is not HIDC, Toby cannot be held liable for the erroneous completion (Toby), the holder must be a HIDC, the note would be valid and effectual as if it had been completed in strict accordance with the authority given and within a reasonable time. While it is true that Toby did not authorize such amount, by his negligence in making the fraudulent act possible, he rather the Ian- an innocent party, must suffer the consequences of its acts. If Ian, pretending to be a fan of Erap, secures his autograph on a blank piece of paper and, then, writes a promissory note over it, may Ian enforce the note? If Ian negotiate it Toby, may the latter enforce the note against Erap? Both may not enforce the note. Sec. 14, while it allows for the filling up of a blank paper with a signature, does not give such authority when the said paper with no intention of it being converted to a NI. It does not matter whether Toby is HIDC or not. Tobys remedy would be to go after Ian, the endorser.

1)

2)

Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. What is the rule on incomplete and undelivered instrument? Here, both stances in the execution of a NI are wanting. The non-delivery of an incomplete instrument renders the note unenforceable as against the person whose signature was placed thereon and is a valid defense, not only between the original parties but also against a HIDC. The law does not - 10 -

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make a distinction when it says that it is not a valid contract in the hands of any holder which includes a HIDC. It is, thus, a real defense as it is available even as against a HIDC. However, the invalidity of the instrument is only with reference to parties whose signature appears on the instrument prior to delivery. As to parties whose signatures appear on the instrument after delivery, the instrument may be invalid. Suppose Toby, before he could complete a note, placed the said paper between the pages of his book. Erwin who borrowed the book and finds the said note, completes it, signs Tobys name and negotiates it to Ian. Ian negotiates it to Jon. Can Jon go against Ian? As the note was incomplete and undelivered, Toby has a real defense as against Jon. It does not matter whether Jon is a HIDC or not. As to Toby, there was never any valid contract to make him liable. But, Jon can still go against Erwin and Ian as they are considered to be parties whose signature appear after the delivery (Erwins signature would appear as an instrument.) All notes when presented for payment arew persumed to be complete and delivered. The purpose of sec. 14, 15 & 16 is to show what defenses are available to makers/drawers upon the presentment of these instruments. For example, in the hands of a HIDC when the note is originallly incomplete and undelivered such presumption is only prima facie. Proof of non-delivery may be presented to rebut the presumption. In contrast, if the note was mechanically but undelivered, the presumpiton is conclusive as to a HIDC. No proof may be presentewd to rebut it. It has been held that where the custody of the incomplete instrument has been entrusted to another who wrongfully completes and negotiates the note to a HIDC, delivery to the agent is asufficient delivery to bind the drawer or maker. Thus, the defense is only a personal defense. The one who being held liable may only show lack of delivery if and when the holder is not a HIDC (may either an immediate party or a holder not a HIDC). Once the holder proves that he is a HIDC, the defense is no longer available. highly improbable that the next party physically will not know such conditions or limitations). What may the maker, drawer, indorser show as against the immediate party or a holder not a HIDC? As against such parties, he may prove that: (1) no delivery was made; or (2) if there was a delivery, it was not authorized; or if the delivery was made or authorized, the delivery was conditional or for a special purpose and not for the purpose of transferring the title to the instrument. In conditional deliveries, what is conditional is the delivery, not the promise or order to pay. If the promise or order to pay is conditional, the instrument is rendered non-negotiable. Eg. A deliver the note to B with the condition that the delivery be binding only if Cs signature was secured. The delivery is not binding on A until Cs signature appears thereon. (The promise or order to pay remains unconditional on the face.) As to special purposes, if a delivers a bearer instrument to B for (1) safekeeping or (2) for collection, B cannot enforce the note against A.

What is the rule on lost or stolen instrument? As soon as the owner discover that he has lost a NI, he should instantly give notice of the lose to all parties on such paper and inform them not to pay the amount to any one except to the loser or is order. This is especially important in bearer instrument (but may also apply to order instrument). No title to a lost bill or note vest in the finder and the owner when he has identified it, may maintain ero an action where the defendant found an article and refused to return it to the owner) against the finder. If the finder has negotiated it and has received value for it, an action for money be maintained against him for such use. A party liable will net be discharged if he pays the amount to the holder of the lost instrument before maturity or if he had notice of the loss unless the holder is a HID. (in such case, the party liable should recover from the finder).

What is meant by immediate parties The term immediate parties is confined to those who are immediate, in the sense of knowing or bieng held know the conditions or limitations placed upon the delivery of the instrument. It means privity not proximity. The cretirion is whether or not the party in question knows of the conditions or limitationas placed upon delivery or the facts that the instrument was not delivered but stolen. Thus, if a party knows of such conditions or limitation, he is an immediate party even if he is physically remote (eg. Maker indorsee who knows)n (NOTE: While proximity is not the critirion, it is - 11 -

Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose

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signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. The rules stated shall not be availed of if the terms of the instrument in question are clear and admit of no doubt. It is only when the instrument in question is ambiguous, doubtful or obscure or when there are omissions therein will the rules apply. EXAMPLE OF THE RULES: (a) Where a PN reads twelve pesos in its body and P 1,200 (in figures) at the margin, the note is good only for P 12. The reasons are: (a) the figures in the margin do not form part of the instrument and is only for convenience: (b) it is easier to change the figures or to commit a mistake than a sum in words. But when the words are ambiguous or uncertain as when the letter Y in eighty thousand is unclear (with P8,000 on margin) or when the note is payable for one pesos ( with P 100 on margin) or P365 is written as three sixty five pesos, the marginal figures control. (b) Where the note stipulates that the amount to be paid is with interest at ______% from____, it is deemed payable from the date in the note or if issue at the legal rate. (c) Where the note states I promise to pay to the rule of J.M ONLY P 10. sgd. X. with J.M ONLY in handwriting, the note is non-negotiable as it is payable to a specified person only. The handwritten words prevail because the written words are deemed to express the true intention of the maker because they are written by him while the printed words are printed with no contract in view. (d) Where a note states I promise to pay Erwin or order P 10. sgd. Toby. Ian, the payee or holder may treat it as either a note or bill according to his preference. (e) Usually, the signature of the maker/drawer is placed in the lower right hand corner if the face, the acceptor across the face and the indorser at the back. Where it is not clear which if the three a person belongs as he signs on the margins, he is presumed to be an indorser.

What is the general rule in Sec. 16? Every contract on a NI even if it is completely written is incomplete and revocable until its delivery. Before delivery, the maker or drawer can revoke, cancel or tear up the instrument. The payee named therein acquires no right until the instrument is delivered to him. Delivery is essential to the validity of any NI. An undelivered instrument is inoperative because delivery is a prerequisite of liability. However, if a complete instrument is found in the possession of an immediate party or a remote party other than a HIDC, there is a prima facie presumption of delivery but subject to rebuttal. If the holder is a HIDC the presumption becomes conclusive and not subject to rebuttal. If the note is found with immediate party or a holder not a HIDC, the one being held liable can show that delivery was not made either him or under his authority. (Delivery may be made by the maker/ drawer himself or through an authorized agent. Delivery may also mean issuance.) But, if the note is with a HIDC, the one being held liable cannot prove such because he is conclusively presumed to have delivered it. Thus, is a maker denies having delivered a complete note, the holder must only show that he is a HIDC and the former can no longer prove his accusation. Sec. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; - 12 -

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(f) Where a note states I promise to pay C or order P10. sgd. A&B., the makers are deemed to be solidarily bound. Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. What is the general rule? Exceptions? GENERAL RULE: A person whose signature does not appear on the instrument cannot be held liable thereon EXCEPTIONS: (1) The principal is liable if duly authorized agent signs on his own behalf (Sec. 19); (2) In case of forgery is liable even if his signature does not appear on the instrument (Sec. 23); (3) Where a person sought to be charged signs on paper separate from the instrument itself, as in an allege although the allege may be considered a part of the instrument, or where an acceptance is written on another paper other than the bill (Sec. 134 & 135); (4) Where a person signs under an assumed or trade name- not really an exception, rather an instance where a persons business name serves the same purpose as his signature. There must be an intention to be found by signing the trade name. (2) Must add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal. (3) Must disclose his principal. EXAMPLES Of no.2 - Jose Cruz by Pedro Vega Pedro Vega as agent of Jose Cruz Of no.3 sdg. Pedro Vega, agent Vega is liable as he fails to disclose his principal (even if he acts within his authority). Agent is deemed as merely a descriptive word, also trustee, administrator one is not relieved from liability by adding descriptive words. Of no. 3 the disclosure of the principal in order to relieve the agent need not be in signature (can be in the body). Eg. I promise to pay X or order P100 for money loaned to Y & Co. sgd. J, Treasurer. The principal is obvious.

Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. What is the authority of an agent by procuration? This agent has but a limited authority to sign and he must act within the limits of his authority. The words per proc. or p.p. serves as a notice to whole world that the agent has but a limited authority. It is the duties of the 3rd person dealing with such agent ascertain the limits of the agents authority. He must remember that he is dealing at his own risk. FORM: Jose Cruz (principal), per proc.: Pedro Vega (agent)

Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. a. The party may sign personally or thru an agent. Agency may be oral or written authority. It may be proved by oral or written evidence, unless specific provisions of the general law require otherwise (eg. Statute of Frauds).

Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.

Sec. 20. Liability of person signing as agent, and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. What are the requisites for an agent to escape liability? (1) The agent must be duly authorized. - 13 -

What is the rule: a minor or corporation indorsing? Ordinarily, a minor cannot give consent to contracts and a contrast entered into by him is avoidable. In the case of corporations, they cannot perform acts beyond the escape of their authority. Such acts would be ultra vires Never the less, if a minor or a corporation endorsee an instrument, the endorsee acquires titles to it and can enforce it agains the maker or acceptor or other parties prior to the minor. Suppose: Lyn prepares a note for Paz, I promise to pay Paz or order P1, 000. sdg. Lynn But Paz is only a minor. Paz

ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)


negotiated the instrument to Lawrence. Can he hold Lynn liable Paz? Lawrence can hold Lynn liable because he acquires title to the instrument by virtue of sec. 22. The instrument is validly his. But Lawrence cannot hold Paz liable because Paz has a valid defense her minority. Minority is real defense in the sense that the Paz may use it as against any holder (even a HIDC). But, Lynn cannot make use of the same defense as it is personal to the minor Paz. Further, as maker, Lynn warrants the existence of the thing as well as the capacity of the payee to enter into the contract. The maker is therefore precluded from putting up the defense that the payee had no capacity. Sec. 22 is also applicable to endorsements by lunatics, imbeciles, and other incapacitated parties. This must be distinguished from fraud in document because the letter is only a personal defense as there really was an intention of issuing an instrument. Eg. A sell to B a diamond rings showing the merchandise to A. But it is only glass. A makes out a check in Bs favor for it. While the consent is vitiated, thus rendering the contract voidable, there was still intent to issue a check. The defense is only available as against the party who perpetrated. Duress amounting to fraud ordinarily, duress is a personal defense. The only exception is if it amounts to forgery as when someone forcibly takes ones hands and affixes that the persons signature. Here, there is a real defense as there was no intention of issuing a negotiable instrument. Fraudulent impersonation in such cases, the maker/drawer is said to have a/double intent. First he intends to make the instrument payable to the person before him or in front of him the person is he is dealing with regardless of nd whoever he is. The 2 intent is that he intends that it be payable not to the person in front of him but to the real person the payee that this st person says he is. In general, the rule is if the 1 intent was present the maker/drawer is liable. So, what is important is the determination of who the payee intended is. Eg. A person approaches me and says, I am Pablo. I have a check in my favor for P10, 000. But the person is really Pedro. Now I issue a check in the name of Pablo. What is my intention? 1 : I intend to the check to the person in front of me to the person I am dealing with. It does not matter whether his name is Pablo or Pedro. I am making the transaction because of what he offers regardless of his identity. 2 : I intend to make the check payable to the real Pablo the person who Pedro says he is.
st nd st

Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. What is forgery?

By forgery is meant the counterfeit making or fraudulent alteration of any writing, and may consist in the signing of anothers name or the alteration of an in strument in the name, amount, description of the person and the likes, with intent to defraud. The intent to defraud distinguishes forgery from innocent alterations and spoliation.

What are the forgeries not referred to in sec. 23?

fraud in factum or fraud in esse contractus. Here, there is fraud in the sense that ther was really no intention to issue an instrument. As it amounts to forgery, it has the effects of forgery such that it is a real defense. eg. B obtains the signature of A by telling A that it is only for autograph purposes or that it is for some document (other than a NI) then B converts the paper into a NI. The fraud here amounts to forgery.

(a) The 1 intent governs because of the theory of actual intent and of stopped or negligence. If the check is encashed, the bank, in paying Pedro would merely give due course to my real intent that it be paid to the person I directly dealt with and to whom I intended it to be paid to. Secondly, because the bank is innocent as I am too, and as between two innocent parties, the one who was negligent must be bear the loss. I was negligent is not ascertaining his identity. I - 14 -

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am stopped to deny my real intent because it was within my power to ascertain but that I failed to do so. st (b) The 1 intent cannot rule when the maker/drawer issues to a person an instrument where the person before him purports only to be an agent of the intend payee (given: maker wasnt negligent). What type of forgery does sec. 23 refer to? 1) but, only the signature forged or made without authority is stated by the law to be inoperative, neither the instrument nor the genuine signatures are rendered inoperative. Proof that the one of several signatures in a note was forged does not necessarily avoid the note as to those whose signatures as are genuine such as those who actively procured the forgery or had knowledge. 2) further, the instrument can be enforced by holders to whose title ever the instrument the forged signature is not necessary., such as, an endorsement of an instrument which on its faco is payable to bearer. Whether an indorsement on a not necessary for the holders title is genuine or forged is immaterial to his right to recover such instruments can be negotiated by mere delivery so that the forged signature is irrelevant to his title. PROBLEM: A made a Promissory note I promise to pay B or order P1, 000. sdg A. A is the maker and B is the payee. B however lost the instrument. C found it and simulated the signature of B and negotiated the instrument to D. D negotiated it to E. Can E go against A, B, C, D? Explain.

Sec. 23says, when a signature is forged it applies therefore only to (1) forged signatures (forger does not purport to be an agent of the person whose signature he has forged) or (2) signatures made without the authority of the person whose signature it purports to be (forger purports to be agent but has no authority). If the problem is something else other than the signature, then sec. 23 will not apply. If what was changed was the amount or the name of the payee, sec. 124 on material alternation rather than sec. 23 should apply.

What are the three fundamental rules as to the effect of a forged signature?

that the signature forged or made without authority is wholly inoperative; that no right to retain the instrument, or to give discharge therefore or enforce payment thereof against any party thereto can be acquired through or under such a signature forged or made without authority. That, nevertheless, as against a party preclude from setting up to the forgery or want of authority, the signature forged or made without authority is operative, and, rights to retain the instrument the instrument, to give discharge therefore , or to enforce payment thereof, can be acquired through or under the signature forged or made without the authority. What is meant by it is wholly inoperative? The word it refers to forged signature, not to the whole instrument. It means that the forged signature cannot be used to transfer title ever that the instrument to another person. The forged signature cannot operate to transfer title to another. Because the signature is inoperative, the holder never acquires valid title to the instrument so that it is a real defense as against any holder. EXCEPTIONS:

ANSWER: First, does this problem involved sec. 23, forgery of a signature? Obviously, it does. Second, find out where the forgery occurred. In this case, the forgery occurred at the point of C. So this is the cut-off point. All those below or subsequent to the cut-off point. Are liable to the holder. All those above or prior to the cut-off point are not liable to the holder. Visually A } not liable B } not liable ---------------------- cut-off point C } liable D } liable E } holder (1) as to D, under sec. 23, D is preclude from setting up the defense of forgery. This is because, under sec. 65 & 66, an indorser warrants that an instrument is genuine and in all respects what it purports it to be. In other words, when D negotiated the note to E, in effect, he said, the instrument is genuine and it is valid. Having impliedly said this, he cannot thereafter say that the instrument is invalid. He is stopped by his own warranty.

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As to C, being the forger, he is guilty of a criminal offense and is liable for all the consequence of his criminal act. But, more than that, under sec. 18 as an exception to the general rule, the forger is liable as he is deemed to have signed under a trade name or assumed name. Thus, the forger has the same warranty as the general indorser. Otherwise, the forger would be occupying a position better than of a general indorser. (1) As to B, because under sec. 10 A person where signature does not appear thereon is not liable on the instrument. B did not sign. Somebody signed for him without his authority. His signature does not appear on the instrument and thus, he cannot be liable thereon. Moreover, under sec. 23, the forged signature (made by C) is totally or wholly inoperative. Therefore, no title was validly transferred from B to C to D to E. therefore E acquired only the right that cannot be upheld as against B and any party prior to the forgery, it being wholly inoperative, there is no right even to retain the instrument or to enforce payment thereof against any party thereto. (2) As to A, insofar as A is concerned, the signature forged is wholly inoperative and therefore it did not validly transfer title to the instrument to E. And E as against A has no right to retain the instrument ant to enforce payment thereof. (Further, A bound himself to pay the order of B. E cannot be regarded as such. maker/drawer) can be held liable but not the maker/drawer. Further, under sec. 18, he whose signature does not appear thereon is not liable on the instrument.

Who are precluded from setting up the defense of forgery?

Those who warrant or admit the genuineness of the signature in question: indorser whether general or qualified, warrant that the instrument is genuine and in all respects what it purports to be (sec. 65 & 66) person negotiating by mere delivery also by sec. 65. Acceptors by accepting the bills, he admits genuineness Those who, by their acts, silence or negligence are stopped from setting up the defense of forgery. Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another in believe that his or anothers signature in an instrument is genuine, an to act upon such belief, he cannot, in any litigation, a rising out of such declaration, act or omission, be permitted to set up the forgery of such signature. Stopped arises from: (1) a declaration; (2) an act; (3) omission or negligence (such as unreasonable delay) What are the causes of forgery in general? I. Forgery of promissory notes: i. forgery of an endorsement in the note; 2.)forgery of the makers signature

SUPPOSE: In problem 1, the note was a bearer instrument but C, in forging Bs signature, indicated that it was payable to him in the back was put Pay to D. sgd.C. D negotiated it to E, Pay to E. sgd.D Can E now go against A,B,C,D? (1) Sec. 23 applies only the instrument payable to order not to those payable to bearer. The forged signature of B is not necessary to the title of the holder. The holder can even cross out all those indorsement not necessary (sec. 48). Once an instrument is payable to bearer, it will always remain a bearer instrument not withstanding the special indorsement. If the crosses them out, it will be as if the note was delivered directly in him. Therefore. E can hold A, B, C, D. While the cut-off point rule is used above in the situation of an indorser, it is also applicable to forgeries of a makers/drawers signature such that all parties such that all parties below the cutoff point (all parties subsequent to the - 16 -

II. forgery of bills of exchange: a) forgery of an indorsement in the bill; b) forgery of the drawers signature. a. with acceptance by the drawee, or b. without such acceptance but the bill is paid by the drawee. The cut-off point rule discussed above is a sufficient guide to see who can be held liable on instruments payable to order whether the forgery is of the indorsement or makers/drawers signature. What remains to be discussed is the liability of the drawee in bills where the indorsement is forged. (below) As mentioned, when the note/bill is payable to bearer, sec. 23 is not applicable but a holder who

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is a HIDC can recover not by virtue of sec. 16 (given the instrument is complete). As to the acceptor, his acceptance precludes him from setting up the defense of forgery by virtue of his warranties in accepting. Also, in paying without previous acceptance, the drawee cannot collect from the drawer nor the recipient HIDC. The acceptor is deemed constructively negligent in failing to meet its obligation to know its customers (drawer) signature. The basis of such liability is not that payment is tantamount to acceptance but that of his negligence. (Here it is the drawers signature which is forged). If the case happened at present, MB would have to reimburse FNCB for the amount. This case, strictly speaking, involves material alteration and is not applicable to Sec. 23 except as tro the liabilities of the drawee bank and the collecting bank in cases falling within the scope of Sec. 23. Therefore, if the drawee bank is vigilant as to inform the collecting bank within 24 hrs. from discovery, the liability for forged checks will lie with the latter. The remedy of the collecting bank is to insure itself against such losses. If the public cannot hold the collecting bank liable, it will no longer use checks but rather cash. Commercial transaction s will bog down. Consequently, the economy will stand still and the banks will suffer. The drawee bank is liable only for the signature of the drawer. It is only to such party that the bank has privity with. The collecting bank has privity with the depositor who is the principal culprit in the case. Thus, it has duty of diligence.

What rules used govern checks?

The same rule used for the other NI the cut-off point rule with the exception of the determination of the drawee banks liability vis--vis each other.

METRO BANK VS. FNCB (118 SCRA 537)

II. CONSIDERATION Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. What does this section provide? Under this Section, the mere introduction or negotiation of a note raises a disputable presumption of a sufficient consideration . It is unnecessary to aver or prove consideration, for consideration is imported and presumed from the fact that it is a NI. The person (maker/drawer or indorser) claiming that a payee or indorsee did not give valuable consideration for an instrument must prove that there really was no valuable consideration given.

Cunanan & Co. drew a check for P 50, 000 with FNCB as the drawee in favor of Manila Polo Club. By unknown circumstances, Sales was able to obtain the check, altered the same (making it payable to cash and for P 50, 000) and deposited it with Metro Bank. MB then sent the check to the CB clearing house with stamp on the back: Metro Bank clearedoffice all prior endorsement and/ or lack of endorsement guaranteed. the check cleared the same day and FNCB paid MB the P 50, 000. Within 6 days, Sales whose account was credited with the amount, withdrew the money. But before the last withdrawal, MB, alarmed at the activity of the account, clarified the matter with FNCB which gave its approval. Upon receipt of the check, Cunanan notified FNCB of the alternation. FNCB asked MB to reimburse the amount but the latter refused. Who is liable? SC declared that under CBC no. 9, the drawee bank (FNCB) must return the check within 24 hrs. from receiving it from the CB clearing house to the collecting bank for any defect such as an alteration. The stamped guarantee of MB must be read with CBC no.? That the liability of the collecting bank on such stamp is limited to the said 24 hrs. Here, FNCB returned the check only after 9 days. Further, the approval given by FNCB of the last withdrawal shows the drawees negligence and stopps them from claiming otherwise. FNCB IS LIABLE. CBC No. 9 has been superseded by CBC No. 580 (1997). Under 580 the attention of the collecting bank must be called within 24 hrs. from the date of discovery of the fraud, forgery or material alteration.

Sec. 25. Value, what constitutes. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. What is valuable consideration? Consideration means inducement to a contract that is, the cause, motive, price or impelling influence which induces a contracting party to enter into a contract. Valuable consideration consists either in some right, interests, profit or benefit accruing to the party who makes the contract, or so, forbearance, detriment, loss or some responsibility to act or labor, or service given, suffered or undertaken by the other - 17 -

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side. Consideration founded on (1) love and affection, or (2) upon gratitude, is good consideration, but does not constitute such valuable consideration as is sufficient to support the obligation of a bill or note, as between original parties. Included on this are gifts, services without expectation of compensation, moral obligations. These are not valuable consideration contemplated by the NIL., although the same are considered so by the Civil Code. A valuable consideration need not be adequate. It is sufficient if it is a valuable one. Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. What is a holder for value? One who gives valuable consideration for an instrument issued or negotiated to him is a holder for value. ILLUSTRATION: A, maker, B, payee. B indorses to C, C to D, D to E, holder. Between A & B no valuable consideration. Between B & C valuable consideration is given. Between D & E it is not known whether value was given. E is a holder for value as to A, B and C because at Cs time there was valuable consideration given and A, B, and C were partiers prior to the time when value had been given. As to D, it is not known. Sec. 27. When lien on instrument constitutes holder for value. Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. Suppose: Erwin, out of love and affection, issued a promissory note in favor of Anne Marie, I promise to pay Anne Marie or order P1,000.00. sgd. Erwin. As a birthday gift. But Anne Marie owes Peter P6000.00. Because of the persistence of Peter for AM to pay him, she surrenders the instrument to him. Peter is now the holder. Can Peter go against Erwin? Given the lack of valuable consideration between Anne Marie and Erwin applying Sec. 27, Peter is considered a holder for value to the extent of his debt or lien- P600 and can go against Erwin for such amount. As to the P400 remaining, as Peter is not considered a holder for value to such extent, he may not collect it. Absence of consideration, being a personal defense (Sec. 28), can be used as against those not HIDC. Since being a holder for value is one of the requisites of a HIDC, Peter can not be considered as HIDC and thus, the defense of lack of consideration is available to Erwin as against Peter. HOWEVER, if sufficient consideration existed between Anne Marie and Erwin, Peter may collect the entire sum subject to the obligation to return the excess to AM. But, also, if the defense of Erwin is a real defense, Peter may not recover from the instrument despite his lien. - 18 -

Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. What is absence of consideration? Failure of consideration? Distinguish the two. Absence of consideration is a total lack of any valid consideration such as when the consideration for commercial paper is clearly fraudulent. Failure of consideration is the neglect or failure of one of the parties to give, to do or to perform the consideration agreed upon. Want or absence of consideration embraces transactions where no consideration was intended to pass while failure of consideration was contemplated but that it failed to pass. Illustrate partial failure of consideration. Suppose that in a note for P1,000.00 the extent of want of consideration is only P600.00 That is, B., payee, gave A, maker valuable consideration to the extent of P400.00. A can interpose want of consideration pro tanto, or proportionate- only to the extent of P600.00. C, holder, if he is not a HIDC, can only collect from A P400.00. But, if he were a HIDC, he can collect the entire amount. What kind of defense is absence or failure of consideration? Failure or absence of consideration , whether total or partial, can be interposed as a defense only against persons not HIDC but not against HIDC. These defenses are, therefore, only personal or equitable defenses. Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. What is an accommodation party? An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser without receiving value therefore, and for the purpose of lending his name to some other person. The requisites therefore are : (1) he must be a party to the instrument, signing as maker, drawer, acceptor or indorser; (2) he must not receive value therefore; and (3) he must sign for the purpose of lending his name or credit. Thus, it is not a valid defense that the accommodation party did not receive any valuable

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consideration when he executed the instrument as the law requires such absence. (In contrast, under the Civil Law, the absence of consideration renders the contract defective.) The placing on the note of the words value received does not negate the character of the note as an accommodation paper. The phrase without receiving value therefore means without receiving value by virtue of the instrument and not as it apparently is supposed to mean, without receiving payment for lending his name. ILLUSTRATION: 1. ACCOMODATION MAKER- A wanted to borrow money from B. But B would not lend the money to A because of the formers bad reputation. A would only lend B the money if the latter were able to secure the signature of C. B asks C to execute a PN in his(B) favor. C makes a PN, I promise to pay B or order P1,000.00 sgd. C. B then indorses the note to A and B gets the P1,000.00 from A. In this eg., B is the accommodated party. C is the accommodated party (maker). He become a party to the instrument as maker but only for the purpose of lending his name or credit to B so that B can raise the money he needs. C who as a maker is ordinarily primarily liable, is only secondarily liable, is primarily liable. This is because ultimately, the accommodated party is the one required to pay. But if due date comes and B cannot pay, C can be held liable to pay despite As knowledge that C is only an accommodated party. Then, C after payment can have recourse as against the one primarily liable, the accommodated party -. (In my opinion, when due date comes is C that A should go against. After payment, only then can B held liable. So, the maker is still primarily liable at least, at first). A corporation cannot be held liable as an accommodation party. This is because a corporation cannot issue instruments without a consideration. And under sec. 22, while title may pass as to the instrument, the corporation may not be held liable due to its want of capacity (to issue consideration - less NI). In such cash, it is the officers who issued the instrument who must be held liable in their individual capacities. Such an act is considered ultra vires. (See cases) 2) ACCOMODATION INDORSER in the eg. Above instead of asking C to execute a PN, B makes a note favor of A. B asks C - 19 to indorse the note without receiving value therefore. Here, C is considered an accommodation indorser. Such endorsement is for the purpose of better securing the payment of the note. 3) ACCOMMODATION DRAWER in the eg. Above, instead of executing a PN, C executes a BOE with B as the payee even though no valuable consideration is received by C.B then indorses the bill to A, who gives the proceeds to B. 4) ACCOMMODATION ACCEPTOR in the eg. Above, instead of ask C to accept the bill drawn by him (B) in this own favor. Then, B indorses the bill (that was accepted by C) to who gives the money. What is the legal position of the accommodation party?

The accommodation party is generally regarded as a surety for the party accommodated. It is not the accommodation party that is ultimately liable for the instrument issued. It is the accommodated party. When the accommodation party makes payment to the holder, they have the right to see the accommodated party for reimbursement since the relation between them is in effect that of principal and sureties. The accommodated party cannot recover from the accommodation party because, as between them, absence of consideration is a valid defense. The understanding between them is either: (1) the accommodated party pays the instrument directly to the holder; or (2) the accommodated party reimburses the amount paid by the accommodation party to the holder. A holder despite his knowledge that the party he holds liable is just an accommodation party can still recover from such party as if there was no contract of accommodation. The knowledge of the holder does not effect his being an otherwise HIDC. Thus, to hold the accommodation party liable, the holder, except for the knowledge of want consideration, must meet all the requisites under sec. 52, that is, the holder for value must have acquired the instrument complete and regular on its face, before it is overdue and without notice of previous dishonor. Where he does not meet all these, thus not a HIDC, sec. 28 not a sec. 29 applies. The accommodation party may interpose the defense of its being an accommodation party to a holder not HIDC. A solidary accommodation party (1) may demand from the principal debtor reimbursement of the amount he paid; and (2) may demand contribution from his co accommodation makers without first directing his action against the principal

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debtor provided that (a) he made the payment by virtue of a judicial demand; or (b) the principal debtor is insolvent. III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. DEFINITION OF TERMS: 1. Transfer- to convey property from one person to another; 2. Holder- the payee or indorsee of a bill or note who is in possession of it or the bearer thereof (Sec. 191). What are the 3 types of transfer? 1. by assignment; 2. by operation of law 3. by negotiation which may either be by indorsement completed by delivery or by mere delivery. What is assignment? Generally, it is a method of transferring a nonnegotiable instrument whereby the assignee is merely placed in the position of the assignor and acquires the instrument subject to all defenses that might have been set up against the original payee. The effect of the assignment is that the p[arty holding the right drops out of the contract and another takes his place. Each assignee takes his chances as to the exact position in which any party making an assignment of it stands. Where the holder of a bill payable to order transfers it without the indorsement, it operates as an equitable assignment but the assignee has the right to compel the assignor to indorse the instrument (Sec. 49). When does transfer of operation of law occur? The full title to a bill or note may pass without either assignment, indorsement or delivery but by operation of law by: 1. the death of the holder, where title vests in his personal representative (Succession); 2. the bankruptcy of the holder, where title vests in the assignee or trustee (insolvency), or 3. upon the death of a joint payee or indorsee in which case the general rule is that the title vests at once in the surviving payee or indorsee. What is negotiation? It is the transfer of an instrument form one person to another so as to constitute the other the holder thereof. There is no negotiation if the transfer does not make the transferee the holder of the instrument. Where the instrument is payable to order, it is negotiated by the indorsement of the holder completed by delivery, and where it is payable to bearer, by mere delivery. But where the instrument is payable to bearer and it was indorsed and delivered, the transferor shall be liable as an indorser. Further, for the holder to hold liable such indorser, the former must be able to trace his title through an unbroken chain of indorsement (Sec. 40) Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. What is the nature of indorsements?

Indorsement is the writing of the name of the indorser on the instrument with the intent either in transfer the title to the same, or to strengthen the security to the holder by assuming a contingent liability for its future payment, or both. An indorserment is not only a mode of transfer. It involves also a new contract and an obligation on the part of the indorser an impiled guaranty that the instrument will be duly paid according to the terms thereof. That, further, if the instrument is not paid by the one primarily liable, the indorser, after due notice of dishonor, will pay. There is an added obligation upon the instrument reside from what appears upon the face of the instrument.

Where is the indorsement written?

The indorsement may be written (1) on the instrument itself; or (2) upon a paper attached thereto. Where it is written on the instrument itself, it is usually written on the back. But, the law looks to the intention of the parties rather to the form as to indorsement. The place is not essential. Where the instrument is written on a paper attached to the instrument, such paper is called an alone. The paper must be attached to the instrument so as to become part of it. A temporary attachment cannot be considered an allonge. Further, the use of an allonge is not limited to when there is an impossibility of indorsing on the instrument due to lack of space. The indorserment is not invalidated by the fact that is written on another paper even if there is still space for indorsement on the instrument itself (Agbayanis opinion). NOTE: an indorsement has to be only in writing. It may thus be printed such as typewritten or stamped.

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What are the 2 kinds of indorsement specified in sec.34? Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. SPECIAL INDORSEMENT- one that (1) specifies the person to whom the inodrsement is payable (eg. Pay to A) or (2) specifies to whose order it is payable, (eg. Pay to A or order). In both cases, the indorsement is followed by the signature of the indorser. The omission of the words of negotiability such as or order and to the order of do not affect the negotiability of the instrument which is negotiable on its face (sec. 36) since it is only an indorsement.

What is the rule on indorsements of the amount?

BLANK INDORSEMENT- ONE WHICH SPECIFIES NO INDORSEE. Such an indorsement generally consists only of the signature of the indorser.

The general rule is that the indorserment must be of the entire amount. An indorsement must of the part of the instrument does not one rate as a negotiation thereof but may constitute a valid assignment binding between the parties ( thus, the holder is susceptible to defenses available against the assigner). An instrument is said to be indorsed partially when eg. The note is for P1,000 but the indorsement states, Pay to X P400. But where the instrument has been paid in part, it may be indorsed as to the residue (eg. in the eg. above, suppose the maker paid P6000 already. The indorsement for P400 would then be valid as the negotiation). Further, an indorsement which purports to transfer the instrument to 2 or more indorsees severally does not operate as a negotiation. (eg. in the above eg., suppose the indorsement read, Pay to X P400 and Y P600 is not a valid negotiation but Pay to X and Y P1,000 is).

How are instruments so indorsed, negotiated further?

Where the instrument is originally payable to order and it is negotiated by the payee by special indorsement, it can be negotiated by the indorsee by indorsement completed by delivery. Where the instrument is originally payable to order and it is negotiated by the payee by blank indorsee, it can be further negotiated by the holder by mere delivery. Where the instrument is originally payable to bearer, it can be further negotiated by mere originally delivery, even if the original bearer negotiated it by special indorsement. (once a bearer instrument, always payable to bearer).

Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. What are the kinds of indorsement?

Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. The difference between special and blank indorsement is only significant. When the instrument is originally payable to order because a bearer instrument, even if specially indorsed, is no different from one indorsed in blank. They are still negotiated by mere delivery.

It may either be: (1) special, or (2) in blank (both sec. 34), or (3) restrictive, or (4)non restrictive (sec. 36), or (5) qualified, or (6) unqualified or general (sec. 38,66), or (7) conditional, or (8) unconditional, or (9) joint (sec. 41), (10)successive (sec. 50,68), or (11) irregular (sec. 64), or (12) facultative (sec. 111). Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.

ILLUSTRATION: A makes a note with B as payee. B negotiates it to C, signing only his signature. C, holder, may place above such signature Pay to C to convert the blank indorsement into a special one.

LIMITATIONS: The holder must not write any contract not consistent with the indorsement, that is, the contract so written must not change the contrat of the blank indorsement. Consistency shall be judge with the intention of the parties.

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Eg. of inconsistent (1) Pay to X and Y when it was intended to be payable to only one person. (2) Demand an d noticed waived. (3) I guaranty payment. (4) without recourse. subject to the defenses available as against the indorser. The restrictive indorsement which are hold to negative the presumption of consideration are such as to indicate that they are not intended to pass title but merely to enable the indorsee to collect for the indorser. Mere absence of the words implying power to negotiate does not make an indorsement restrictive. Thus, Pay to X is the same as Pay to X order where the instrument is payable to order. The omission of the word order does not render the indorsement restrictive. But while the omission of the words of negotiability in the indorsement does not affect the negotiability of the instrument, ssuch omission in the body thereof will render the instrument non-negotiable. Restrictive indorsements serve to limit only the negotiability of an instrument originally negotiable. Sec. 37. Effect of restrictive indorsement; rights of indorsee. A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. ILLUSTRATION: In the indorsement, Pay to A for collection. sgd. P. a is merely an agent of P and because of this, A may (1)receive payment of the instrument; (2) bring any action thereon that the indorsee could bring (subject to the same defenses available against the indorser); and (3) if authorized, may transfer his right to another by negotiating the instrument. But such subsequent indorsee acquires only the title of the agent, A, whose right is merely to colloect.

Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. What is a restrictive indorsement?

A restrictive endorsement is one so worded that it either restrict or prohibits entirely the futher negotiation of an instrument, an indorser notifies all prospective holders that the indorsee has only the authority to deal with the instrument as thereby directed and that the indorsee has only a restrictive title thereto. By such indorsement, an indorser can safeguard his interest whenever he should find it necessary to entrust negotiable paper to another. A restrictive indorsement destroys the negotiability of the instrument and bars further negotiation to a HIDC. All subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Eg. of (a) prohibition Pay to C only or Pay to C and no other. Of (b) agency type of restrictive indorsement Pay to C collection. or Pay to C for deposit. Here, C does not acquire title over the instrument. He is merely an agent of the indorser. Thus, he is subject to all the defenses available as against the indorser. Of (c) in trust for another Pay to X in trust for C. or Pay ti X for the use of C. Here, there is transfer of legal title to the instrument to the indorsee as trustee. And give notice that the paper cannot be negotiated by him for his own debt or for his own benifit. Further, it is he opinion of learned writers that the indorsee is not

The right to receive payment and the right to bring any action that the indorser could bring are available under any form of restrictive indorsement. The 2 rights are the basic rights of indorsees in instruments with restrictive indorsement. Not all forms of restrictive indorsement destroy negotiability of an instrument. Only those which fall within sec. 36 (a) do so. While all three forms of restrictivce indorsement impose some degree of limitation and it is the indorsement itself that discloses the extent of the limitation. This is the reason for (c). The indorsee may, if authorized, negotiate further the instrument but all subsequent

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indorsees acquire only the title of the original indorsee an agent. What is an absolute indorsement? A conditional indorsement?

Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. What is qualified indorsement?

It is one made by adding to the indorsers signature the words without recourse, indorser not holden, at indorsees one risk, ao any words of similar import. It constitutes the indorser a mere assignor of the title to the instrument. Without recourse means without resort to a person who is secondarily liable after the default of the person who is primarily liable. The purpose of such indorsement is to trasfer title without guaranteeing payment. In effect the indorser states that all parties to the paper and genuine, that t he indoreser is the lawful holder of that paper and has title to it, and that he knows of no reason why the indorsee cannot recover, but that he does not guarantee the financial responsibility of the parties on the paper.

An absolute indorsement is one by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, and upon due notice to him such failure. On the other hand, a conditional indorsement is one by which the indorser annexes some other condition to his liability, that is, where there is some condition in the indorsement. The indorsement is subject to the happening of a contogent event (an event that may or may not happen) or a past event unknown to the parties. Like restrictive indorsements, it must be remembered that the pressure of conditions in the indorsements does not render the instrument non-negotiable. Only if the condition is on the face or on the original contract of the instrument is the instrument rendered non-negotiable as the promise or order to pay is conditional.

When can the qualified indorser be held secondarily liable?

In general, an indorser is secondarily liable. A qualified indorser is still secondarily liable but his liability is limited. He is not entirely free from secondarily liability. He is secondarily liable on breaches of his warranties as an indorser under sec. 65. He can be held liable if the instrument is dishonored due to: 1 forgery 2 lack of good title on the party of the indorser: 3 lack of capacity to indorse on the part of prior or parties 4 the fact that, at the time of indorsement, he knew that the instrument was valueless or not valid. The only thing he does not warrant is the solvency of the person primarilyliable if the failure to recover was due to the fact of the insolvency at the time os indorsement, he is liable for breach of is warranty that he did not know of any fact that the instrument was valueless. A qualified indorsement does not impair the negotiable character of the instrument.

ILLUSTRATION: A executes a note in favor of B for P100. B indorses the note to C stating into the indorsement, Pay to C, if he passes the bar exams. Sgd. B. it is a conditional indorsement as the event is not certain to happen (and it is in the indorsement). But, under sec. 39, the maker can disregard the condition and pay C the proceeds despite the non-occurrence of the event. The maker may also honor the condition set and refuse to pay. If the note was paid, C holds the proceeds thereof in trust while the condition is not fulfilled. C does not acquire ownership over the sum. It is upon fulfillment of the condition that such ownership over the proceeds is absolutely acquired by the conditional indorsee.

Sec. 40. Indorsement of instrument payable to bearer. Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. This section applies to instruments which are originally payable to bearer. It does not apply to order instruments converted to bearer instruments because the only or last indorsement is in blank.

What is the rule on indorsements of bearer instrument? Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. - 23 -

By virtue of this sec., an instrument payable to bearer is not converted into an instrument payable to order by being indorsed specially and therefore, the indorsee mey further negotiate the instrument by mere delivery. This means that an instrument which is originally payable to bearer is always payable to bearer. But, such indorser, because of his

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indorsement, can be held liable secondarily by those holders who can trace their title to the instrument by the series of unbroken indorsements form such special indorser. His liability is that of a general indorser as provided in sec. 66. person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. What is the presumption raised in sec. 42? The presumption is that the instrument payable to the cashier or other fiscal officer of a bank or corporation is presumed payable to the bank or corporation to which such person is a cashier or fiscal officer. It is presumed not payable to the said officer. The instrument may be indorsed by any duly authorized (by the laws of the said bank or corporation) officer of the entity other than the said cashier or fiscal officer. But the presumption established is disputable by sufficient proof to the contrary (eg. that the instrument really belongs and is payable personally to the cashier as the real creditor of the maker or drawer). This rule is equally applicable to instruments drawn payable to the treasurer of municipal or public corporations (eg. a town). But, since town does not fall within the scope of corporation in sec. 42, the treasurer may not indorse the said instrument.

ILLUSTRATION: A executes a note payable to bearer for P100 in favor of B. B delivered it to C. C specially indorsed it to D. D specially indorsed it to E, holder. Can E go against A,B,C,D,? E cannot go against B, because there is mere delivery and there is no unbroken chain of indorsements. The rule is that the holder must trace his title to the special indorser to make him liable through an unbroken chain of indorsement. E cannot go against B because. As a person who negotiates by mere delivery (to C), warranty under sec. 65 extends only to the immediate transferee. Thus, B is only liable to C, not to D & E. E can go against C & D because E can trace his title to C (& D) through an unbroken chain of indorsements. NOTE: this section deals with special indorsements, not blank indorsement. So, that if, in the eg. above, C blankly indorsed it to D, E cannot go against C as it would be impossible for him to trace his title to C. (my opinion) (contrary to Abads) Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. This section applies only to instrument payable to two or more payees jointly (eg. Pay to the order of A and B). it does not apply to instrument payable to two or more payees severally. (eg. Pay to the order of A and B). the latter may be negotiated by the indorsement of one payee.

Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. ILLUSTRATION: An instrument drawn payable to Alfie Almedo when the name of the payee is really Alfie Almeda may be indorsed (1) by using the misspelled name Pay to X. sgd. Alfie Almedo. (2) Or by writing the misspelled name with the proper name - Pay to X. sgd. Alfie Almedo sdg. Alfie Almeda.

What is the rule in joint payees? Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. How must an agent indorse?

Where the instrument is payable to two or more payees (jointly), all payees must each indorse in order to negotiate the instrument. If only one indorses, he passes only his part of the instrument. But such an indorsement would not operate as a valid negotiation because it would not be an indorsement of the entire amount which is contrary to sec. 32. Exception is made for such rule: (1) where the payee or indorser has authority to indorse for he others; and (2) where the payees or indorsees are partners.

Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a - 24 -

He must indorse in the same manner as an agent of the maker, drawer or acceptor should in order to escape personal liability as required in sec. 20. Thus, (1) he must add words describing himself as an agent; and (2) at the same time disclose his principal (he may also sign only the name of the principal); and (3) he must be duly authorized. Otherwise, he is personally liable.

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Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. What does this mean and why is it important? Does the negotiable character cease after maturity?

When the payee indorsees the instrument without dating his indorsement, the presumption is that he indorsed it on or before the notes maturity date. But, this presumption is rebuttable or disputable by the sufficient proof to the contrary and the burden of proof is on the person who claims it was negotiated after its date maturity. If the indorsement id=s dated, then the presumption in this sec. Will not arise but that presumption in sec. 11 that the date written is presumed the true date of indorsement. This section is important because in order to constitute one a holder in due course, he must have taken the instrument before it was overdue. With this presumption, the person who claims that the holder is not a HIDC, has the burden of proving so.

No. the mercantile character (1) of the instrument as negotiable instrument and (2) of the contracts of the several parties to it, continues after it maturity and until it is paid except (3) that an indorsee or transferee after maturity takes the instrument subject to defenses between the prior parties, because after maturity such subsequent parties take the instrument after becomes overdue, and thus, under sec. 52(b), they are not HIDC. Transfer to such transferees would be equivalent to a mere assignment and subject to defenses. The position of the holder is that he is a holder with notice because he takes a bill, which, on its face, ought to have been paid. He is bound to make two inquiries: (1) has the bill been discharged? And (2) if not, why not? Was there a defect in the title of the person who held it at maturity? But, even if he is not a HIDC, he recover from the note subject only to defenses as if it were non-negotiable.

Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. What is the importance of this sec.?

Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. When may the holder strike out indorsement?

The place of indorsement is sometimes material because an indorsement is governed by the laws of the state where it is indorsed, although the instrument is drawn or made in a different state.

ILLUSTRATION: A bill is dated thus: Manila, Phil., Jan. 7, 1990. It is subsequently indorsed without writing the place of indorsement. The presumption is that it was indorsed in Manila. But such presumption is rebuttable.

Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. What is the general rule on the negotiable character of NI?

The rule is that once an instrument is negotiable at its origin, it continues to be negotiable until 1 it is respectively indorsed (in such a way that is prohibits further negotiation of the instrument under sec. 36 [a]); or 2 is discharged by payment or otherwise. Otherwise refers to the different ways to discharge an instrument enumerated in sec. 119.

A holder may strike out any indorsement which is not necessary to his title. But where an instrument is transferred by a special indorsement, the holder has no right to strike out he name of the indorsee and place his name in its place nor to convert such special inodrsement to a blank one. An instrument payable to bearer on its face may be negotiated by mere delivery without indorsement. In case it is indorsed, the holder, by virtue of sec. 48, may strike out all intervening indorsemnent or any of them because none of them are essential to his title. But an instrument originally payable to order may be negotiated only by the indorsement of the payee completed by delivery. When the indorsement is special the indorsement of the special indorsee is necessary for further negotiation of the instrument and may not be struck out. When the indorsement is in blank the instrument becomes payable to bearer and may be negotiated by mere delivery. Any special indorsement subsequent to such blank indorsement may be struck out as they are not they are not necessary to the holderss title (he may claim that the payee blankly indorsed to him) but the payees indorsement itself may not be struck out as the indorsement is necessary to his title.

What is the effect of striking out indorsement?

- 25 -

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(1) the indorser whose indorsement is struck out is relieved form liability (secondary) on the instrument; and (2) all subsequent indorsers are also relieved from their liability on the instrument. NOTE: conditional indorsements may not be struck out even if they are not necessary to the title. cannot be considered a HIDC as he had knowledge of a defect on the title at the time of negotiation. Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. This sec. applies only to instrument payable to order. This contemplates a case where there is delivery and payment of value but no indorsement. There is lacking one element for the negotiation of the instrument the indorsement by the payees or indorser. Thus, it operates as an equitable assignment. What are the rights of the transferee for value? (1) the transferee acquires only the rights of the transferor, such that if a defense is available against the transferee. The transferee has also the right to require the transferor to indorse the instrument.

ILLUSTRATION: A executed a note payable to the order of B. It is indorsed as follows: A B C D E B. - Under this sec., B may continue to negotiate the note or may recover from it as a holder (he keeps it instead of negotiating it). Where he negotiates it (prior to maturity), after paying the subsequent holder ( supposing he is held secondarily liable), he may not claim payment from any of the intervening parties C, D, E as it would result in circuity of suits. Also, if B decides to keep the note and try to recover from it, be may not enforce payment against C, D, E for the same reason.

IV. RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument. Who is a holder?

(2)

ILLUSTRATION: A executes a note in favor of B but there is no valuable consideration. B delivers the note to C for value and under circumstances that would have made C a HIDC (such that C does not know of the absence of consideration) where it not for the lack of Bs indorsement. Can C recover from A? No, because C acquires only Bs rights and B cannot collect from A who can set up the absence of consideration. The transferee is not a holder because while he is in possession of the instrument, he is not he indorsee. He is merely an assignee. What can it be determined whether such transferee is a HIDC? The time for determining whether the transferee is a HIDC is as of the time of actual indorsement not a time of the delivery. The reason is that negotiation is completed at the time of indorsement, not at the time of delivery. ILLUSTRATION: In the eg. above, suppose the note was delivered on Dec. 1, 1990 but was indorse only by B on Dec. 15, 1990. but on Dec. 10, 1990, C found out of the absence of consideration. Thus, on Dec. 15, the time of indorsement, C - 26 -

The holder is the person who is physically in possession of the instrument. If you are not in possession of an instrument, you cannot be a holder, much less, a holder in due course. Even if you are owners of an instrument but you are not physically in possession of it, the person primarily liable on the instrument has all the right to refuse payment because upon payment of the instrument of the instrument by the person primarily liable thereon, he has all the right to retrieve the instrument. Once retrieved, he can have that instrument as a more voucher of payment. It is possible that you may have lost the instrument. The ownership over it by the copy of the lost of instrument (?). Only then will the person primarily liable on the instrument be compelled to pay the instrument. What are the classes of holders? (1) Holders in general (sec. 51); (2) Holders for value (sec. 26); and (3) Holders in due course (sec. 52,57)

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What are the rights of a holder in general? (1) He may sue on the instrument in his own name; and (2) He may receive payment and if the payment in due course, the instrument is discharged. Who has the right to sue on the instrument? The holder of a negotiable instrument may sue in his own name, even if he a holder only for collection or as a pledge of an instrument. It is believed that even a transferee of an indorsed instrument (sec. 49) may sue in his own name if the transferee could have done so. This is because a transferee of an instrument for value but without endorsement, under sec. 49 is vested with such title such title as the transferor had if the transferor had legal title, this must pass by the transfer although subject to defenses. What is payment in due course? Payment in due course is payment made (1) at or after the maturity of the instrument, (2) to the holder thereof, (3) in good faith and without notice that his title is defective. Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. What is a holder in due course? A HIDC is a holder who took the instrument under the conditions enumerated in sec. 52. All the four conditions must concur a HIDC. If any one of them is absent., the holder cannot be considered a HIDC. Under sec. 59, generally, every holder is presumed prima facie to be a holder in due course. Thus, a holder need out proved at a very outset that he is a HIDC. Any one who claims otherwise must prove that the holder in question acquired the instrument with one or more conditions lacking. When is an instrument complete and regular upon its face? - 27 Complete means that the holder acquired the instrument without any material particular lacking thereon, that all material particulars are present on the face of instrument at the time the holder acquired it. An instrument is deemed not complete only when there is an omission of any material particular or particular proper to be inserted in a negotiable instrument without the same will not be complete. (Not all forms of omissions will make the instrument incomplete. It must be necessary to the instrument). Eg. The instrument is issued undated and stated, I promiz to pay X or order P100. sgd. Y. Is it complete? Yes because the date is not necessary. But if the note stated, I promise to pay X or order P100 30 days after date now Becomes a material particular, as maturity cannot be determined without it. An incomplete instrument should put the holder in inquiry as to why it is incomplete. If he fails to do so, be takes the instrument subject to all defenses as he is not a HIDC. Regular means that the holder acquired it without any alteration or changes or erasures apparent on the face of the instrument. (The most common type of irregularity is an alteration. It must be apparent on the face; otherwise, the matter is governed solely by sec. 124 which renders the instrument void). If it appears that there was a change in the amount or in the name of the payee, etc., then the instrument is deemed not regular on its face and the holder now has the duty of inquiring. Otherwise, if no inquiry is made , the holder acquires the instrument not in good faith and deemed to have notice of a defect or infirmity in the instrument. ILLUSTRATION OF NOT COMPLETE AND REGULAR: 1) a note payable on a given date without naming the year; 2) an accepted bill with no drawee named; 3) a note payable to 2 payees but indorsed only by 1; 4) a printed note altered in printing; 5) a note payable on or before after date. When is the instrument overdue? An instrument is overdue after the date of maturity. The date of maturity is the time fixed therein. It may be a fixed or determinable future time. If the instrument is payable on demand, the date of maturity is determined by the date of presentment. If it is a promissory note, it is supposed to be presented within a reasonable time after its issue. But if it is a bill, it is should be presented within reasonable time after its last negotiation. Eg. Suppose an instrument is issued today, July 17. In Aug., it was negotiated. In Oct., again, until Dec. When was it supposed to be presented? If it was a PN, it must have been presented within a reasonable time after its issue, July. But if it was a BOE, it

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must be presented within a reasonable time after its last negotiation, Dec. The point of reckoning will differ. Reasonable time is a relative term defending on a circumstance. If the instrument is payable on the occurrence of a specified opening of the event. When the instrument contains an acceleration clause and one installment is not paid. Knowledge of the holder of this fact at the time of acquisition is notice that the instrument is overdue. Similarly, if, by the terms of an instrument, the principal is due upon default of payment of interest, the holder cannot be considered a HIDC where the interest is overdue. If the holder acquired the instrument on the date of maturity, it is not overdue as the debtor has the whole day to pay. (If presented to a ba, anytime before close of banking hrs. if presented to a business office, anytime before close of business hrs. And if presented at the house of the person primarily liable, anytime before the end of the VILMA Show or before rest hours.) A NI in circulation past its maturity date carries strong indication that it has been dishonored. An instrument may be dishonored either by non-acceptance (sec. 149) or by non-payment (sec. 85). Dishonored by nonacceptance, refers only to a bill of exchange. While dishonor by non-payment can only take place at the time of maturity, dishonor by non-acceptance of a bill may occur even before the date of its maturity. The holder must, at the time of negotiation, have no knowledge that it had been dishonored prior to his acquisition. Thus, an overdue or dishonored instrument may still be negotiated to the same extent as before maturity (sec. 47) but, in case of the former, the holder cannot be a HIDC, while in the case of the latter, the holder without notice can be a HIDC. SUPPOSE: A PN reads: I promise to pay X or order P100 on July 17, 1991. Today is the due date. X presents the note at 10am. It was dishonored by non-payment. At 12nn X negotiated it to P.P is now the holder of the note. Is P a HIDC? IT DEPENDS on whether at the time of negotiation P knew of the fact that it was dishonored. Since it was negotiated on the due date, it was still on July 18, P can no longer be HIDC as it is overdue and he is charge with knowledge of dishonor. The fact that the note was already dishonored is not enough to deny P of his capacity of being a HIDC if he had no knowledge of such dishonor. What does acquired in good faith mean? Good faith refers to the indorsee or transferee and not to the indorser or transferee of the paper. Even if the indorsee is in bad faith, the indorsee may still be a HIDC. Under sec. 56, bad faith means that he must have knowledge of facts which render it, dishonest for him to take a particular piece of NI. To show bad faith, it is not necessary to show knowledge of the exact truth but actual knowledge of some truth that would prevent action by th commercially honest men. Surmise, suspicion or fear is not enough. The element of good faith - 28 must be read together with the element of notice or knowledge of an infirmity on the instrument or defect on the title of a prior party. If the holder knew of such defect or infirmity, he cannot be held to be in good faith. The term holder in good faith means a holder without knowledge or notice of equities (defenses) of any sort which could be set up against a prior holder of the instrument. What does for value mean? As discussed in sec. 25, the holder must take the instrument for valuable consideration. Any consideration sufficient to support a simple contract is value. But love and affection do not constitute value. Where the holder takes the instrument without giving valuable consideration, he cannot be considered a holder for value, moreso a HIDC. It is not necessary that the consideration be adequate (art. 1355, NCC). But if the amount asked for the instrument is insignificant as compared to the face value, it should be sufficient notice that there is something wrong and failure to inquiry is equivalent to bad faith.

What is meant by without notice of infirmity in instrument or defect in the title? The NIL, in defining things that may be wrong with an wrong with an instrument uses 3 terms. (1) Defects of title, (2) defenses, and (3) infirmities. Defects of title cover all those situations giving rise to equitable defenses. Defective title of a person over an instrument may result from circumstances relating to the persons acquisition of the instrument or as to how he negotiated it. Defect of title is further elucidated in sec. 35. In the cases cited in said section, the person acquiring the instrument is said to have a defective title over it. But, in order for the holder to be not a HIDC, he must have knowledge of the defect atr the time of negotiation. The term defenses includes 1. mistake, 2. absence or failure of consideration (sec. 28); 3 minority and other forms of incapacity (sec. 22); 4. lack of authority of an agent (sec. 19). Infirmities on the other hand, include things that are wrong with the instrument itself, they are illnesses which attach to the instrument, such as: (1) wrong date as inserted (sec. 13); (2) filling up of a blank instrument not strictly in accordance with the authority given or not within a reasonable time (sec. 14); (3) filling up and negotiating without authority an incomplete and undelivered instrument (sec. 15); (4) lack of valid and intentional delivery of a mechanically complete instrument (sec. 16); (5) agent signing per procuration beyond the scope of his authority (sec. 21); (6) for forgery (sec. 23); (7) material alternation (sec. 124 & 125). As in the case of defects in title, the mere fact that such defenses and infirmities exist does not prevent the holder from being a HID. Rather, it is the fact that, at the time of

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negotiation, he had actual knowledge of such defects, defenses or infirmities. This fourth condition must be read together with the condition that the holder take in good faith. In effect, the fourth condition elucidates the meaning of good faith. Anyone who acquires the instrument with notice of such defects and infirmities would not qualify as a taker in good faith. To constitute notice, under sec. 56, the holder must have had actual knowledge of the infirmity or defect or must have acted in bad faith. The absence of knowledge and lack of bad faith is essential basis that renders a holder a HIDC. As previously stated, notice of defect can also be presumed when (1) one takes an overdue instrument, and (2) one acquires an instrument for grossly inadequate consideration. Remember that the concept of HIDC is only applicable to negotiable instrument. Once the instrument is nonnegotiable, the assignee of the instrument cannot be considered a HIDC. considered a HIDC for the value paid by him before he had notice of the defect - P600.

Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. When is title of a person defective? The title to a person in an instrument becomes defective either: (1) in the acquisition of the instrument (a) by fraud; - refers to fraud in inducement - he acquires the instrument by falsely inducing its issuance or negotiation. (b) by duress, or force and fear; - refers to the use of violence and intimidation to cause the issuance or negotiation. (c) by other unlawful means; - such as theft. (d) for an illegal consideration. - the instrument is issued or negotiated as a consideration for an illegal act or omission. (2) in the negotiation of the instrument (a) with breach of faith; - refers to negotiation of the instrument in contravention of the terms of the agreement, or negotiation after it has been paid (discharged), or negotiation before the consideration for the instrument is given. (b) under circumstances as amount to a fraud. - refers to negotiation after being told that payment would be resisted, or transferor had no legal right to transfer. Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. When does the holder have notice of defect or infirmity? To constitute notice or defect or infirmity, the transferee must have actual knowledge, either: (1) of the defect or infirmity, or (2) of such facts that his action in - 29 -

Sec. 53. When person not deemed holder in due course. Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. One of the requisites of a HIDC is that he aquires the instrument before it is overdue. But, obviously, where the instrument is payable on demand, the holder cannot determine whether the instrument is overdue or not as there is no maturity date. The law here states that the holder must have acquired it a reasonable time after its issue. As to what constitutes reasonable time, regard must be had to the nature of the instrument, the usage of trade of business with respect to such instruments and the facts of a particular case (sec. 193). With the regard the BOE, the law states that it should be presented within a reasonable time from last negotiation. This should be read in the light of sec. 53 so that the last negotiation should be itself within a reasonable time from its issue. This is especially true for checks where after a certain period the check becomes stale if not presented for payment within a reasonable period of time from issue.

Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. ILLUSTRATION: A draws a bill in favor of B for P1, 000 with X as drawee. B indorsee it to C, who fails to give value therefore. C indorses it to D upon the terms of payment of P600 now and the balance of P400, D discovers the absence of consideration. Under the circumstances, D can be

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taking the instrument amounts to bad faith. Knowledge of some truth (at least) that the instrument is tainted in some way is necessary, not mere suspicion or surmise. Bad faith consist in guilty knowledge, or willful ignorance, showing a vicious or evil mind. While mere suspicion is not enough, where there is knowledge of suspicious circumstances, coupled with means of verifying them, taking of the instrument may amount of bad faith (if, willfully, no inquiry is made). But negligence, even gross negligence, is not bad faith. instances, the real defense applies only to the person who made the instrument (but there are exceptions). As a general rule, a real defense is a defense which the person against whom one is endeavoring to recover may set up and that person to usually the person primarily liable upon the instrument. Further, a defense available to the makers will not be available to the indorser (nor will a defense available to the indorser be available to the maker). [ in case of joint maker defense available to one joint maker is not, in general available to the other except if the defense goes to the meat of the case defeating holders right to recover. For, eg,, if _ defense is minority, it is available to both]. Personal or equitable defenses are those which grow out of the personal or equitable defenses. Agreement or conduct of a particular person regard to the instrument which renders it inequitable for him, though holding legal title, to enforce it against the person being held liable, but which are not available against HIDC. They are called personal defenses because they are only available against that person (payee or indorsee) or a subsequent holder who stands in privity with him

Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. What are the rights of a HIDC?

(1) he may sue on the instrument in his own (sec. 51); (2) he may receive payment and if payment is in due course, the instrument is discharged (sec.51); (3) he holds the instrument free from any defect of title of prior parties; (4) he holds the instrument free from defenses available to prior parties among themselves; and (5) he may enforce payment of the instrument for the full amount thereof against all parties liable thereon. What are the 2 kinds of defenses that might be available to parties held liable on the instrument?

To what kind of defenses does a HIDC hold the instrument free from?

A HIDC holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves. The defenses referred to in sec. 57 from which the HIDC is free from, are not equitable defenses only, not legal defenses.

Does the HIDC hold the instrument free from infirmities of the instrument?

Real or legal defenses are those that attach to the instrument itself and can be set the whole world. It is available against the holders including HIDC. They are called real defenses because they attach to the res (the instrument itself) regardless the merits or demerits of the holder. In real defenses, the right sought to be enforced has never existed or ceased to exist. It is a defense against everybody but it is not a defense available for everybody. The instrument cannot be enforced only against the person to whom the real defense is available. Thus, the mere existence of a real defense not imply that the instrument is valueless and can never be enforced. It just means that the instrument is only unenforceable against the party entitled to set up the defense (eg. the one primarily liable) but can be enforced against those whom such defense is not available (eg. those secondarily liable). In many - 30 -

No, the holder of the instrument, if a HIDC, holds the instrument free from defect of title prior parties and from defenses available to prior parties among themselves (sec. 57) but the law does not say that he acquires it free from the infirmities of the instrument. An infirmity is an illness, a defect which attaches to the instrument itself whenever it goes. They are attached to the instrument. They are real defenses which can be put up even against HIDC. Infirmities are things that are wrong with the instrument. The latter are only personal defenses. (Abads opinion) (DISREGARD THIS QUESTION) [NOTE: But if infirmities are real defenses, what good is it that the holder, under the sec. 52to be HIDC, must have no notice of an infirmity in the instrument? Even if he had no notice of it, the HIDC is prevented from collecting

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from person liable because of a real defense the infirmity.] is understanding and reason. (13) ultra vires acts of corporation where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued. (14) want of authority of agent where he has apparent authority; (read art. 1869, NCC) (15) insanity where there is no notice of insanity on the part of the one contracting with the insane person; (16) illegality of contract where form or consideration is illegal; - eg. usury notes; Gambling notes. (17) set-off between immediate parties; this is a defense only when the holder has a debt against the person held liable. (18) discharge between original parties; - original parties

What are examples of personal defenses?

(1) absence of failure of consideration, partial or total; - (read sec. 28) want of consideration may be raised only as between immediate parties. (definition of immediate in sec. 16) (2) want of delivery of complete instrument; (read sec. 16) (3) inserting of wrong date in an instrument where it is payable at a fixed period after date and it is issued undated, or where it is payable at a fixed period after sight and the acceptance is undated; (read sec. 13) (4) filling up blank contrary to authority given or not within reasonable time, where the instrument is delivered; (read sec. 14) (5) fraud in inducement; (read sec. 55) - in fraud in inducement, one knew that he was signing a negotiable paper, and thus, signed with knowledge that the instrument would probably pass into hands of an innocent purchaser but was deceived into signing for a larger amount than he intended, or on different terms. The signer is led by deception to execute what knows is a negotiable instrument. This is different from fraud in factum where here is no intention to issue a NI. (6) acquisition of instrument by force, duress or fear (sec. 55) - Duress consist of depriving one of his will and understanding and by threat or Unlawful means. (7) acquisition of the instrument by unlawful means; (sec.55) (8) acquisition of the instrument for an illegal consideration; (sec. 55) (9) negotiation in breach of faith (sec. 55) (10)negotiation under circumstances that amount to fraud; (sec. 55) (11)mistake; in order that mistake may vitiate consent, it must refer to the substance of the things which is the object of the contract or those conditions which have principally moved one or both parties to enter into the contract.

Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in - 31 -

(12) intoxication; - intoxication so as to deprive the person sought to be charged of the exercise of

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due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. V. LIABILITIES OF PARTIES Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. When is a person deemed an indorser? (c) That all prior parties had capacity to contract; When there is no indication in what capacity a person signs upon the instrument, he is deemed an indorser. EXCEPTION: One making a note payable to his own order does not assume liability as indorser despite his indorsement. X placed his signature upon an instrument without indicating in what capacity he was signing. Later, X souight to show, by parole evidence, his intention to be bound merely as an agent. Can X be allowed to do this? X cannot be allowed to show by parole evidence that he did not intend to be bound as an indorser. The law requires that he indicate by appropriate words his intention to be bound in some other capcity on the instrument itself. In the absence of this indication, X is deemed an indorser. - 32 (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course: The following are examples of words indicating that the person who signs on the instrument does not intend to be bound as an indorser. I hereby guarantee payment of this instrument. as surety, as guarantor, for identification only But when the note itself reads., We, the signers, indorser, sureties, and all of us in solido, promise to pay, etc., the signers on the back of the instrument before delivery were held to be bound in solido, not as indorsers. This is a case where the intent to be bound in some other capacity may be found on the face of the instrument.

Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. Sec. 65. Warranty where negotiation by delivery and so forth. Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it;

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a. The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. Sec. 72. What constitutes a sufficient presentment. Presentment for payment, to be sufficient, must be made: (b) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. What is the importance of Sec. 72? Sec. 72 establishes the four requisites for a sufficient presentment for payment. If the presentment does not comply with ay of the four, it is not sufficient. Consequently, it would be as if, the presentment was made and, thus, the persons secondarily liable are discharged. Who makes presentment? Presentment for payment must be made (1) by the holder of the instrument , or (2) by some person authorized to receive payment on his behalf. When and where must presentment be made? It must be made at a reasonable hour on a business day. What is reasonable hour on a business day depends upon the general custom at the place of the particular transaction. In the Philippines, for example, commercial banks are open 9am to 4 pm. Presentment for payment can not be made on a Sunday or holiday (Sec. 85, 194). The presentment must be made at the proper place as defined in Sec. 73. To whom must presentment be made? It must be made to the person primarily liable. If a note, it must be made to the maker. If a bill, it must be made to the acceptor. It is not made to the person secondarily liable. But, if the person primarily liable is absent or inaccessible, presentment can be made to any person found at such place even without special authority given him. Sec. 73. Place of presentment. - Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented;

(b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 67. Liability of indorser where paper negotiable by delivery. Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.

Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent. ILLUSTRATION: X is an agent of Y. X delivers to Z a note payable to bearer in his capacity as Y agent. When X made a delivery, however, he did not tell Z that he was merely acting as an agent. X incurs all the liabilities prescribed in Sec. 65. He can not be released of these liabilities upon proving that he was merely acting as an agent.

VI. PRESENTATION FOR PAYMENT Sec. 70. Effect of want of demand on principal debtor. Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers.

Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on - 33 -

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(c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. What is the rule on proper place of presentment? The proper place of presentment is the place specified in the order of enumeration from subsection (a) to subsection (d). This means that if subsection (a) can be applied (eg. A place of payment is actually specified), presentment in any other place under subsection (b) to (d) will be improper and will not meet the requirement of Sec. 72 (c). Similarly, subsec (c) is only applicable if subsec. (a) and (b) cannot be applied. Lastly, subsec. (d) is applicable only if presentment cannot be made at any other place. ILLUSTRATION: Of (a) : I promise to pay to X or order P100 at PNB, Manila. Sgd. Y. Of (b): In the same note, PNB, Manila is omitted but it was signed as sgd. Y, 404 Regina Bldg., Manila; Of (c ): The note neither specifies a place of payment nor does it indicate the address of the person to pay. But the makers residence or business office is known by the holder. Either place will do. Of (d): If no place is specified, no address is given, and both the address and business office is not known, presentment is made when seen (anywhere). Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. Why is exhibition of the instrument necessary? Presentment includes not only demand for payment but also the exhibition of the instrument. Valid presentment requires personal, or face to face demand at the proper place, exhibiting the instrument to the person from whom payment is demanded. If the instrument is not exhibited, the presentment would be ineffectual, as the debtor is entitled to see the instrument and demand its surrender upon payment. Thus, the purpose of exhibition is to enable the debtor: (1) to determine the genuineness of the instrument and the right of the holder to receive the payment; and t (2) to enable him to reclaim/ possession upon payment. Can presentment be made through telephone? No, because the instrument must be physically produced and this is not possible through phone. This is because the person primarily liable has the right to inspect and retrieve or take - 34 possession of the instrument upon payment. Once, it is retrieved, the instrument becomes merely a voucher of payment and prevents the instrument from being negotiated rd to innocent 3 parties who are unaware of the fact of discharge and may hold the person primarily liable for payment again. When is exhibition excused? (1) When the debtor does not demand to see the instrument but refuses payment on some other grounds; and (2) When the instrument is lost or destroyed. Sec. 75. Presentment where instrument payable at bank. Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. What is the rule where the instrument is payable at a bank? Where an instrument is payable at a bank, it is equivalent to an order to the bank to make payment for the account of the principal debtor (Sec. 87). If the instrument is payable at a bank and the person to make payment has fund in the bank to meet it on the date of maturity, presentment must be made during banking hours. Presentment made outside banking hours is not sufficient inasmuch as banks do not make payments outside of banking hours. In the Philippines. The banking hours are from 9 am to 4 am (but Agbayani claims it is only up to 2:30pm) from Monday to Friday. There are no banking hours on Saturdays and Holidays. Consequently presentment must be made between 9 am to 4 pm on ordinary days. Otherwise, presentment would not be sufficient and persons secondarily liable on the bill are discharged. But it must be remembered that the person to make payment has until the close of banking hours in which to pay it, and if before the close of such hours, he deposits funds there enough to pay it, a demand earlier in the day is premature. However, if the person to make payment has no funds in the bank to meet the payment at any time during the day, presentment at any hour before the bank is closed is sufficient to hold persons secondarily liable- the reason being that at any rate, the bill cannot be paid even is presented during banking hours. (The last rule is important as the persons secondarily liable may claim that presentment is premature. Sec. 76. Presentment where principal debtor is dead. Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Sec. 77. Presentment to persons liable as partners. - Where

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the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. NOTE: The rules stated in all 3 sections apply only, to cases where no place for presentment is specified. If there us a place specified, these rules are inapplicable and presentment must be made at the place specified. What is the rule on the death of primary party? In case of the death of the person primarily liable, and no place of payment is specified, presentment for payment may be made to his executor or administrator, (1) if there be one, and (2) if he can be found. The holder must use reasonable diligence to find the personal representative, if there be one. What is the rule if the persons primarily liable are partners? Presentment may be made to any one of the partners, even if their partnership has been dissolved. The reason is that each partner is an agent of the partnership or his co-partners. Accordingly, in case of death of one of the makers who are partners, presentment shall not be made to his personal representative but to the surviving partners. What if the parties primarily liable are not partners? If the persons primarily liable are not partners, their liability is only joint. In joint obligation, there are as many debts as there are debtors, each debt being considered distinct and separate from 1208, C.C. ) Thus, presentment must be made to all of them. However, if one of them is duly authorized by the others for the purpose, presentment to him would be sufficient. Sec. 79. When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. NOTE: Sec. 79 refers only to the drawer specifically. All other parties secondarily liable will be discharged ( since no presentment). Similarly, Sec. 80 refers only to the indorser for - 35 whose accommodation an instrument is made or accepted. All others parties secondarily liable are discharged. These 2 sections give 2 exceptions to the general rule that if no resentment for payment is made, the persons secondarily liable are discharged. When is presentment not required to charge the drawer liable? 1. In case of a check upon which payment has been stopped. 2. Where the drawers balance is less than the amount of the check (at the time of presentment) unless arrangements have been made for payment of the bill. 3. Where the drawer of a bill containing the words Pay from balance had no money on deposit with the drawee but expected to arrange with the broker to cover the drafts. 4. Where the drawer and the drawee are the same person or where the drawee is a fictitious person, or a person without capacity to contract (Sec. 130) because the holder mat treat it as a note and the drawer is considered a maker. Under section 70, a maker is liable even without presentment. Why is the accommodated party-indorse not discharged? The accommodated party-indorser is the real debtor and not the maker or acceptor. As the accommodated party did not give value to the accommodation party, the former has no reason to expect that the instrument will be paid upon presentment.In effect, the accomodated party is the person primarily liable. Hence, the accomodated party indorser, being in effect the person primarily liable is not discharged even if no presentment for payment is made. This is in consonance with the rule that failure to make presentment for payment will not discharge the person primarily liable. Sec. 81. When delay in making presentment is excused. Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Sec. 82. When presentment for payment is excused. Presentment for payment is excused: (a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person;

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(c) By waiver of presentment, express or implied. Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid. Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. NOTE: In determining the proper date for presentment, count from the day following the date from which the time is to run (e.g. the date of the instrument, or date of sight, or date of the happening of the specified event) and include the last day of the period as the maturity date. But if dated 5 April 1991 and payable one month after, the due date is 5 May 1991. If dated 31 January and payable one month after, the due date is Feb 28 or 29 depending on whether it is a leap year. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. payment made before maturity would constitute a negotiation back the person primarily liable and he can re-negotiate it (sec. 50). (2) payment must be the holder; and - payment to indorsee who is not in possession of the instrument is not payment in due course and is at the risk of the party so paying. Party making payment must insist on the presentment of the paper by the person demanding payment in order to make sure that it is at the time in his possession and not outstanding in other. (3) payment must be made by the debtor in good faith and without notice that the holders title is defective. - payment to a person by the debtor who knows that such person stole it, is not payment in due course , as such payment is not in good faith. The maker or acceptor must satisfy himself, when it is presented for payment, that the holder traces his title through genuine indorsements. Medium of payment the payment of debts in money shall be made in the currency stipulated and if not possible, in the currency which legal tender in the Philippines. When payment of an instrument is made by giving (other than legal tender), as a general such payment will not be considered absolute until the paper given has been itself paid except when parties agree otherwise. A check presented by the holder to the bank where it is drawn and receive as a deposit and credited to his amount, this amounts to a payment of the checks. VII. NOTICE OF DISHONOR Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. What a notice of dishonor? Notice of dishonor is bringing, either verbally or by writing to the knowledge of the drawer or indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been paid and that the party notified is expected to pay it. (If such notice is given by a notary public, it is called a protest (sec. 153). What are the purposes of a notice of dishonor?

Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. What are the requisites for payment in due course? (1) payment must be made at or after the date of maturity; - 36 -

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(1)to inform the parties secondarily liable that the maker or acceptor, as the case may be has failed to meet his engagement; (2) to advice such parties that they will be required to make payment. (3) by a party to the instrument who may be compelled to pay it to the holders; - However, such a party cannot give notice of dishonor to everybody but only to another party against whom he has a right of reimbursement should such party giving notice pay the instrument. (4) another person in behalf of such party; Notice by a mere stranger is ineffectual unless he is acting as agent of a party who is entitled to give notice of dishonor. ILLUSTRATION: M makes a note payable to the order of P. P negotiates the note to A. A to B, B to C, C to D, holder. M dishonors the note in the hands of D. (a) D or his agent may give notice of dishonor to P, A, B, C, or to any one of them. (b) if the D notifies C only, the latter, who thereby can be compelled by D to pay, may, in turn, notify P, A and/or B to whom C, if he pays,. Has the right of reimbursement. (c) if D give notice only B, the effect is to discharge C due to lack of notice since B would have no right of reimbursement from C and thus, no right to give notice to him. (d) C, upon his discharge, becomes a total stranger and as such is not entitled to give notice unless he is acting as an agent of a party who can give proper notice of dishonor. May a maker or acceptor, at any time, give notice or dishonor? Yes, only when the maker or acceptor acts as an agent of the person entitled to give notice.

What is the rule on notice of dishonor? When an instrument is dishonored by (1) non-acceptance (bill) or (2) non- payment (both bill and note), notice of such dishonor must be given to persons secondarily liable, namely, the drawer (in a bill) and indoresers (in both bill and note). Otherwise, such parties are discharged. However, the holder is not required to notify the drawer and all indorsers. He may select to hold only one or some of the indorsers and any party not so notified is discharge. Therefore, the holder, in order to fix the liabilities of the parties secondarily liable, must give a notice of dishonor at least, to such parties he may have selected. Further, it is incumbent upon the holder to prove the fact of giving notice, in accordance with the law, as part of his case. His cause of action (enforcement of payment) will not given substance or will not be upheld by court if he fails to prove such fact. Lastly, the law does not require that the notice be given to the persons primarily liable (maker or acceptor) because they are the very ones who dishonored the instrument. NOTE: The exceptions to this general rule of notice are found in secs. 109, 112, 114, 115, 116, 117. In instruments payable in installments, does failure give such notice of dishonor of a previous installment to persons secondarily liable discharge them on succeeding installment? It depends. If the instrument contains no acceleration clause, they are not discharged because each installment is equivalent to a separate note. If there is an acceleration clause and it is automatic (in operation), they are discharged. If the acceleration clause is optional and it is not exercised, it is the same as if no such clause existed and as a result, they are not discharged therefore. If the optional acceleration clause has been exercised, the persons secondarily liable are excused.

Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. NOTE: Notice of dishonor may be give by an agent (sec. 90). The agent need not be authorized by the principal to give the notice. Notice may be given by the agent: (1) in the name of any party entitled to give the notice (sec. 90); or (2) in his (agents) own name. Thus, any person can be agent of any party entitled to give notice (so as long as he gives notice for such party and not for his own sake).

Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Who gives the notice of dishonor? (1) the holder; or (2) another behalf of the holder; or - 37 -

Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. What does benefit mean? The word benefit refers to the right to charge the person secondarily liable who receive notice. In other words, the

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party to whom this benefit inures can charge the party receiving notice of dishonor, even if he himself did not give the notice. To whom does this benefit inure to? Notice given by or on behalf of the holder inures to the benefit: (1) of all parties prior to the holder, who have the right of recourse against the party to whom the notice is given; and (2) of all holders subsequent to the holder giving notice. ILLUSTRATION: M makes a note payable to the order of P. P negotiates it to A. A to B, B to C, C to D, holder. M dishonors. D notifies P, A B, and C. (a)the notice given by D to P operates to the benefit of A, B and C although they were not the one who gave the notice as they have the right of recourse against P if any of them be held liable to pay the instrument. (b) but, the notice given by D to B does not operate to the benefit of P and A since the latter do not have the right of recourse against B. The notice to B, though, would benefit C who has such right of recourse against B. (c) if D subsequently negotiates the note E, the notice inures to Es benefit although he himself did not give any E need not give another notice of dishonor. (d) Suppose D, when the instrument was dishonored, gave notice only P, A and C. D later negotiated it to E. Can E go after B to whom notice was given? No. the effect of Ds failure to notify B was to discharge him from liability. The benefit of sec. 92 cannot be extended to those already discharged. (following this trend of thought, if E goes after C and the later pays, C can no longer go after B even if he had a right of recourse against him). (a) Ordinarily, A, B and P are considered discharged from their liability for lack of notice (sec. 89). (b) But, if C, within the time fixed by law (sec. 94, 107), gives due notice to B, and B gives notice to A and A to P, all three will not be considered discharged. (Subsequent notices must each be within the time fixed by law). (c) Can D go after P despite the absence of notice given by the former to the latter? Yes, the notice given by A to P inured to the benefit of D, holder (sec. 93) although the latter failed to give notice P. (d) Suppose D instead went after B and succeeded in collecting. May B go after P? yes, Although B never gave notice personally to P, the notice by A also inures to the benefit of parties subsequent to the party to whom notice is given.

Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. What may the agent do if the instrument in his hands is dishonored? (1) he may directly give notice to the persons secondarily liable thereon; or - the agent must do so within the time fixed by secs. 102, 103, 104 and 107. Otherwise, the parties secondarily liable are discharged for lack of notice unless the principal himself notified them. (2) he may gave notice, within the time fixed by law, to his principal. - the time in which the principal was a party secondarily liable.the principal, upon receiving such notice, has also the same time for giving notice to the parties secondarily liable as if the instrument was dishonored on the day he received the notice. Thus, notice to the agent of dishonor does not constitute notice to the principal. The agent is treated like an independent holder. Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all

Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. How is sec. 93 different from sec. 92? The principal involved is the same. However, the notice sec. 93 is given, not by the holder but by a party entitled to give notice under sec. 90 namely, by party to the instrument who might be compelled to pay it to the holder, and who, upon taking it p, would have a right of reimbursement from the party to whom notice is given. Such notice inures to the benefit of: (1) the holder, and (2) all parties subsequent to the party to whom notice is given. ILLUSTRATION: M made a note payable to the order P. P negotiated it to A. A to B, B to C, C to D, holder. M dishonors the note and D notifies only C.

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cases be given by delivering it personally or through the mails. Is there any form required for the notice of dishonor? No. Notice of dishonor may be in writing or merely oral. Thus, notice may be given by telephone provided that it may be clearly shown that the party notified was really communicated with, that is fully indentified as the party at the receiving end of the line. What must the notice contain? (1) sufficient description of the instrument to identify it; (2) a statement that it has been presented for payment or for acceptance, and that it has been dishonored. (If protest is necessary, the notice must also cointain a statement that it has been protested); and (3) a statement that the party giving notice to look for the party addressed for payment. What if one of the three is omitted? The fact that the insufficient does not invalidated it. The notice may be supplemented by oral or verbal communications stating the things lacking. In fact, even if the notice was not be invalidated. Supposing there is a misdescription of the instrument, will that fact affect the validity of the notice? Generally, misdescription of the instrument, such as to the amount or the date of the name of the parties or the date of maturity, does not vitiate the notice provided that the person to whom such notice is addressed is not misled thereby as to the identity of the instrument, if the said party is misled, the notice is vitiated. The purpose of the notice is to appraise the party entitled thereto of the dishonor of the instrument so that if the said party, despite the misdescription, is not misled, the notice is sufficient. How may the notice be given? The party giving said notice to serve notice: (1) by personal delivery; or (2) by mail. But, in a personal service, it must be shown that either actual personal service, or an ordinary intelligent, diligent effort to make personal service upon the indorser at his place of business during business hours or at his residence if he has place of business, was made. Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. NOTE: Under sec. 91, the agent giving notice need not be authorized by the principal. But, under sec. 97, an agent to be competent to receive notice of dishonor must be authorized. - 39 Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution. NOTE: the reason for the rule is that each partner is an agent of the partnership of which he is a member. Notice to one is notice to the others. This is true even though the notice was fraudulently suppressed by the partners receiving it. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. The reason for the difference is that, while in sec. 91, the giving of notice benefits the principal, in sec. 97, the receipt of notice creates liability. If the agent, in sec. 97, is not authorized, the notice in valid. Suppose notice was attempted to be given to the party himself but he was not present. Does the notice have to be given only to an authorized agent? No. Notice to agent must be distinguished from notice attempted to be given to the party himself where he is absent. In the latter case, the notice may be left with anyone found in charge in the partys place of residence or business. Such notice is sufficient and it is irrelevant that the person was not so authorized by the principal.

Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased. What are the requisites of this sec.? When the person to be given notice of dishonor (the party sought to be charged) is dead, notice must be given to his personal representative, provided that: (1) his death know to the party giving notice,; (2) there is a personal representative; and (3) if with reasonable diligence he could be found. Accordingly, where the holder knew the indorser to be dead, he must use reasonable diligence to find out whether there is a personal representative of such decedent or not, and, if there is one, his identity. But, although the party is dead, (1) if his death is not known to the party giving notice but there is no personal representative, or (3) if there is one but he cannot be found with reasonable diligence, then, notice may be sent to the last residence or last place of the deceased. The first preference will be the person, the representative. Only in his absence should the notice be sent to such place.

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NOTE: Sec. 100 does not apply to joint payees or joint indorsees. This is because, under sec. 68, such persons deemed solidarily liable. Accordingly, sec. 100 applies to joint parties other than joint payees and joint indorse, such as, to drawers who sign a bill jointly, or to joint accommodation indorsers who are not solidarily liable under sec. 68. if one of such joint parties are not given notice, he will be discharged. Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. NOTE: This sec. contemplates 2 situations: (1) the party secondarily liable has been declared a bankrupt or an insolvent and (2) the party secondarily liable has made an assignment of his properties for the benefit of creditors (even if not bankrupt or insolvent). In either case, notice may be given to the party himself or to his trustee or assignee. From the moment that notice is duly served, the liability of the secondary party is fixed. In the case of bankruptcy or insolvency, it does not mean that just because notice has been given, one can immediately proceed against such party. It is still necessary to file a complaint with the insolvency court and participate in the insolvency proceedings together with all creditors so that the properties of the insolvent may be distributed to all those with claims pro rata. But, the act of giving notice of dishonor must be proven in court. Otherwise, absence of proof discharge the insolvent from liability insofar as that instrument is concerned. Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. NOTE: The time for giving notice is fixed in secs. 103, 104 & 107. May notice of dishonor be given before the date of maturity? No, because an instrument cannot be said to be dishonored for non-payment unless presented and presentment must be made on the date of maturity unless presentment is excused. But even when presentment is excused, the instrument cannot be said to be dishonored by non-payment unless it is overdue and unpaid. Notice must be given only when it is actually dishonored. Notice given before the instrument is due is premature and insufficient. ILLUSTRATION: A is in possession of a note which will mature on Sept. 15, 1991 (30 days from today). The party primarily liable told A that he will not pay the instrument on due date. Can A, before Sept. 15, give notice of dishonor already? No, the note has not yet matured and notice given earlier than such date is premature. May it be given on the date of maturity? Yes, provided that the notice of dishonor be given after the close of banking hours. The party primarily liable is given the whole day in which to make payment. If the instrument is presented on the date of maturity and is dishonored, but later in the day, the party is primarily liable manifests his willingness to pay, any prior notice would be premature. Remember, the party liable has the whole day in which to make payment. Further, to give notice, the instrument must have been: (1) presented for acceptance or for payment, and (2) it was dishonored. Why must notice be prompt? The purpose of giving prompt notice is to give the persons secondarily liable every opportunity to secure themselves.

Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: (a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. (b) If given at his residence, it must be given before the usual hours of rest on the day following.

(c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following. Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: NOTE: Secs. 103 & 104 refer to the maximum time limit allowed by the law to give notice. It may be given earlier. However, if the notice was given beyond the time limit, it would be considered not to have been given ant the parties secondarily liable will be discharged from liability. The time limit for giving notice depends upon whether the person receiving notice resides in the same place as the person as the person giving it, or not What means are provided for in secs. 103 and 104 to give notice? - 40 -

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In sec. 103, notice of dishonor may be given either (1) personally; or (2) by mail. In sec. 104, it may be given either (1) by mail or (2) otherwise than by mail (eg. Messenger, telegram). What is meant by (a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision. Sec. 105. When sender deemed to have given due notice. Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows: (a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or (b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all - 41 parties; but, where it is written above the signature of an indorser, it binds him only. Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence. Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment. Sec. 115. When notice need not be given to indorser. Notice of dishonor is not required to be given to an indorser in either of the following cases: (a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation. NOTES: Remember FICPA This section applies only to the indorser concerned. It does not excuse notice to other indorsers. Failure to give to the others will result in their discharge. Under subsec (c) , the

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indorser (the accommodated party) is in fact the principal debtor and is not entitled to notice. EXAMPLE OF CASES WHER SEC. 115 DOES NOT APPLY: In these cases, notice of dishonor to the indorser is not excused: 1. Where the maker of the instrument is a partnership and the indorser sought to be charged is a member thereof; 2. Where no presentment was actually made; 3. where the indorser was treasurer of the maker corporation, not active in its management and signed the note in behalf of the corp. The bottom line, for Sec. 114 and 115 is that notice is not needed to the drawer or indorser concerned when (1) he has knowledge of the dishonor by means other than through a formal notice; and (2) he has no reason to expect that the instrument will be honored. Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. Sec. 118. When protest need not be made; when must be made. - Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or nonpayment, as the case may be; but protest is not required except in the case of foreign bills of exchange. VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. Why will the discharge of the instrument operate to discharge the secondary parties? If the instrument is discharged under sec. 119, it ceases to have force and effect. Hence, all parties, primary or secondary, will also be discharged since there is no instrument to be liable on. But the discharge of the secondary parties does not necessarily bring about the discharge of the instrument. When will cancellation of the signature work as a discharge? It is only when the signature of the indorser is intentionally cancelled by the holder that the former is discharge as if he has never been a party to the instrument. If there was a mistake in the appreciation of facts, there is no intentional cancellation. But, once an indorsement is canncelled, there is prima facie presumption of intention cancel. Also, the right of the holder to cancel the signature of an indorser is subject to the limitation that the indorserment is not necessary to the holders title. Aside from the indorsers discharge, what further effect will the cancellation have?

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The discharge of a party by intentional cancellation of his signature also operates as a discharge of parties subsequent to the party discharge. The reason for the rule is that the discharge deprives a subsequent party of a right of recourse against the party discharged by the holder. Thus, suppose A, maker, issues a note in favor of B. B negotiates it to C, C to D, D to E, E to F, holder. F cancels Cs signature. D and E will also be discharged because both would be denied their right of recourse against C in case one of them is made to pay the instrument. PROBLEM: In the same example, if F, instead of canceling the indorsement of C, presented the note to A who refused to pay. F notifies Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. What are the effects of payment by a secondary party? 1. 2. The instrument is not discharged. But the party paying is. The payer is remitted to his former rights against parties prior to him. If the payer was a HIDC, even if at the time of payment he already had notice of defects of title, he can enforce his rights as if he was a HIDC. The payer can strike out his indorsement and those of subsequent parties to him. The payer can renegotiate the instrument. have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes: (b) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. BILLS OF EXCHANGE IX. FORM AND INTERPRETATION Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. Sec. 128. Bill addressed to more than one drawee. - A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession. Sec. 129. Inland and foreign bills of exchange. - An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face - 43 -

3. 4.

NOTE: The right to renegotiate is qualified by the exception provided in pars. (a) and (b). Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to

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of the bill, the holder may treat it as an inland bill. Sec. 130. When bill may be treated as promissory note. Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note. Sec. 131. Referee in case of need. - The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or nonpayment. Such person is called a referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may see fit. X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value. Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Sec. 137. Liability of drawee returning or destroying bill. Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while - 44 otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. Sec. 140. What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere. Sec. 141. Qualified acceptance. - An acceptance is qualified which is: (c) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; (b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; (c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time;

(e) The acceptance of some, one or more of the drawees but not of all. Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. XI. PRESENTMENT FOR ACCEPTANCE

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Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged. What is presentment for acceptance? Presentment for acceptance is the production or exhibition of a bill of exchange to the drawee for his acceptance. What is the general rule on presentment for acceptance? GEN.RULE: Presentment for acceptance is not necessary to render any party to the bill liable. EXCEPTIONS: 1. Where it is payable after sight or in any case where presentment for acceptance is necessary to fix the maturity of the instrument; 2. Where it is expressly stipulated; 3. Where it is drawn payable elsewhere than at the residence or place of business of the drawee. In these three cases, it is necessary (1) to present the bill for acceptance, or (2) to negotiate it within reasonable time to charge the drawer and all indorsers. The reason is that the drawer and indorser have a right in having the bill accepted immediately in order to shorten the time of payment and thus put a limit to the period of their liability and likewise to enable them to protect themselves by other means before it is too late, if the bill is not accepted and paid within the time originally contemplated by them. In the 3 cases, where the bill is not presented for acceptance nor negotiated within reasonable time, the parties secondarily liable will be discharged from liability. Other than the 3 cases, presentment for acceptance is not required and failure to do so would not affect the instrument in any manner. However, there is nothing wrong in making presentment for acceptance in other cases (even if not - 45 (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee. How should presentment for acceptance be made? In order that presentment for acceptance may be proper, it is necessary that it be: (a) made by or on behalf of the holder; (b) at a reasonable hour; (c) on a business day; (d) before the bill is overdue; (e) within a reasonable time after acquisition thereof; and (f) to the drawee or some person authorized to accept or refuse acceptance on his behalf. To whom should presentment for acceptance be made? Generally, it must be made to the drawee or some person authorized to accept or refuse acceptance on his behalf. However, where there are 2 or more drawees, presentment must be made to all of them unless (1) one is duly authorized to accept or refuse acceptance, or (2) they are partners. Where the drawee is dead, it may be made to his personal representative. May is used because by Sec. 148(a), presentment is really excused. Where the drawee is adjudged a bankrupt or has made an assignment, it may be required). And, if the bill is dishonored, by non-acceptance, the holder may treat the bill as if it had required acceptance. What are the reasons for the exceptions? In exception (1) it is essential to present for acceptance to fix the maturity date of the instrument. (e.g. A bill payable 30 days after sight will not mature unless seen by the drawee. Only when it is seen will the 30 day period start). In exception (2) it is to comply with the expressed stipulation of the parties in the bill itself. In exception (3) it is to inform the drawee of the existence of the bill so that he can make arrangements for its payment on the date of maturity at the place designated. Sec. 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and (a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative;

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made to him or his trustee or his assignee. But, here, the use of may does not excuse non-presentment. It is used to mean that the choice of to whom presentment will be made is in the alternative. Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. NOTE: The rule in Sec. 72 and 85 regarding day of presentment for payment is the same as for presentment for acceptance. Only in Sec. 146, no distinction is made between instruments payable on demand and those payable at a fixed or determinable future time unlike in Sec. 85. Thus, whether it is payable on demand or at a fixed date, where it is presentment for acceptance, it may be made before 12 noon on Saturday provided it is not a holiday. Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. NOTE: Sec. 147 excuses delay in making presentment for payment when such is caused by presenting the bill for acceptance at a place other than the place where the bill ids drawn payable. Sec. 148. Where presentment is excused. - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment can not be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground. NOTE: Sec. 147 excuses delay in making presentment for payment caused by presenting the bill for acceptance. Sec. 148 excuses non-presentment for acceptance. Where the drawee is (1) dead; (2) has absconded; (3) fictitious; or (4) a person not having capacity to contract, - 46 presentment for acceptance is excused because it would be futile to expect that a valid acceptance would be given. An irregular presentment in which acceptance is refused on the other ground is where presentment is made on a Sunday and thus, irregular but the acceptance is refused on the ground that the drawee has no funds ion the hands of the drawee. Sec. 149. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. NOTE: As to par (a) cases provided for in Sec. 132, 133 and 142. As to par. (b), it refers to Sec,. 148. But, it is not sufficient that presentment for acceptance be excused but also that the bill remains not accepted. Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. What is the duty of the holder in Sec. 150?

If, within 24 hrs. after presentment (sec. 136) the bill is not accepted, the person presenting it must treat the bill as dishonored. This means that the holder must take the necessary proceedings against the drawer and each indorser , that is, have the bill protested when required and give notice of dishonor. Otherwise, the drawer and the indorsers will be discharged. Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. What are the rights of the holder where bill is not accepted? When a bill is dishonored by non-acceptance, the holder, after giving notice of dishonor and protesting when required, may immediately proceed against the drawer and indorsers for the value of the bill without waiting for the date of maturity. Presentment for payment need not be made since payment can not be expected after acceptance has been refused. There is no point in waiting for the date of maturity to present the bill for payment. But if the bill is subsequently accepted, presentment for payment is necessary.

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XII. PROTEST Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for nonacceptance, by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. Sec. 153. Protest; how made. - The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify: (a) The time and place of presentment; (b) The fact that presentment was made and the manner thereof; (c) The cause or reason for protesting the bill; (d) The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. Sec. 154. Protest, by whom made. - Protest may be made by: (a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses. Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. Sec. 156. Protest; where made. - A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance, it must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. Sec. 157. Protest both for non-acceptance and non-payment. - A bill which has been protested for non-acceptance may be subsequently protested for non-payment. Sec. 158. Protest before maturity where acceptor insolvent. Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer - 47 and indorsers.

Sec. 159. When protest dispensed with. - Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence. Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof. XIII. ACCEPTANCE FOR HONOR Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by nonacceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. chanrobles law Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Sec. 166. Maturity of bill payable after sight; accepted for honor. - Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance

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for honor. non-payment is required. It is not applicable to promissory notes. Payment for honor may be availed of when the holder, knowing that the bill has already been dishonored for nonpayment, does not want to indorse the bill and thereby incur the liabilities of an indorser. What is the difference between acceptance for honor and payment for honor? In acceptance for honor, there is an acceptor for honor. In payment for honor, there is a payor for honor. The difference between the two is that while in the former, the acceptor must ber a stranger to the bill, in the latter, the payer for honor may be a party liable on the bill. Further, in the former, the bill must not be overdue. In the latter, it is overdue. Also, in the former, there may be several acceptors while, in the latter, there can only be one payer. Finally, in the former, the protest must be for non-acceptance or for better security, while, in the latter, it is for non-payment. What are the requisites to perform a valid payment for honor? 1. 2. 3. 4. 5. XIV. PAYMENT FOR HONOR Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. Sec. 172. Payment for honor; how made. - The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. Sec. 173. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. What is payment for honor? Payment for honor is payment made by a person, whether a party to the bill or not, after it has been protested for nonpayment, for the benefit of any party liable thereon, or for the benefit of the person whose account it was drawn. It is also called payment supra protest because prior protest for - 48 The bill has been dishonored for non-payment The bill has been protested for non-payment Payment supra protest is made by any person, even a party thereto and as to form the payment must be attested by notarial act appended to the protest, or form an extension to it The notarial act must be based on the declaration by the payer for honor or his agent of his intention to pay the bill for honor and for whose honor he pays.

Sec. 167. Protest of bill accepted for honor, and so forth. Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows: (a) If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity. (b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four. Sec. 169. When delay in making presentment is excused. The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need. Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him.

What is the procedure for payment for honor? 1. The payer or his agent goes to a notary public and declares his intention to pay the bill and for whose honor he pays. The notary then records the declaration in the protest or in a separate paper attached to it. the payer then notifies the person for whose honor he pays within reasonable time.

2. 3.

What if the payment for honor is not attested by a notarial act? It will operate as a mere voluntary payment and the payer acquires no right to full reimbursement against the party for whose honor he pays. (Art. 1236-1237, NCC). He acquires the right of reimbursement only up to the extent that the party for whose honor he paid is benefited thereby. Similarly, failure to notify the person for whose honor he pays within reasonable time will result in the payment being considered in the same manner. Sec. 174. Preference of parties offering to pay for honor. -

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Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference. Note: The rule is different in acceptance for honor (Sec. 161, last clause) ILLUSTRATION: A draws a bill payable to B, with X as drawee. B negotiates it to C, C to D, D to E, E to F, holder. X refuses to honor it and F duly protests non-payment. If Y offers to pay for the honor of C, while Z offers to pay for the honor of B, the latters (Z) will be preferred as Zs payment will discharge more (C, D, E). Ys offer will only work to discharge D & E. Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. What are the effects of payment for honor? 1. All parties subsequent to the party whose honor it is paid are discharged; and 2. The payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party whose honor he pays and all parties liable to the latter. ILLUSTRATION: In the example above, suppose Z did not offer and, as a result, Y made payment. What are the effects? a. D and E are discharged because they are parties subsequent to the party for whose honor it is paid ( C ). b. Y acquires the rights of F, holder, as against C, B,A and X because C is the party for whose honor he pays and the rest are considered as parties liable to C. ILLUSTRATION: In the above example, if Y offers to pay for the honor of C and F refuses, F loses the right of recourse against D and E as they are parties who would have been discharged had the holder accepted payment. But as to C, the party in whose honor Y offers to pay, is not discharged because, as to him, even if F accepted, C would not be discharged. The party for whom the instrument is paid for is never discharged from liability by the payment for honor of the payer. Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest. What are the rights of the rights of the payer for honor? 1. 2. He acquires the rights of the holder (Sec. 175); and He has also the right to receive the bill and the protest. The purpose of (2) is to enable him to enforce his rights against those who are liable to him by virtue of Sec. 175. XV. BILLS IN SET Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. - 49 -

Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment. NOTE: In payment for honor, the holder cannot refuse payment. If he does, he cannot recover from the parties who would have been discharged had he accepted it. The rule is different from acceptance for honor because in such a case, the holders consent is necessary.

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Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged. XVI. PROMISSORY NOTES AND CHECKS Sec. 184. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. Sec. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. When are checks supposed to be presented for payment? Checks are to be presented within a reasonable time after its issue or the drawer will be discharged from liability to the extent of the loss caused by the delay of presentment. Although a check is a BOE, it must be presented within a reasonable time from issues and not from last negotiation so that the transfer of a check to successive holders does not extend the time for presentment. A check is intended for immediate use and not to circulate as promissory note. But the discharge of the drawer is predicated on the fact of loss so that, if there were no lose, then the drawer is not discharged (though the check is stale) and the original obligation subsists. What are the requisites in order to discharge the drawer? 1. 2. 3. The check is not presented within a reasonable time after its issue; The drawer suffers loss; and The loss suffered by the drawer is attributable to the delay. practice sets the period within which presentment of a check must be made- 6 months. Otherwise, it is considered as stale. What is meant by to the extent of the loss caused by the delay? The discharge of the drawer is conditioned upon the suffering of a loss attributable to the delay. If no loss or injury is shown, the drawer is not discharged. The only loss which would be sustained by the drawer in case resentment was not made within a reasonable time would be that caused by the insolvency of the bank subsequent to the delivery and prior to the presentment of the check. It does not include the withdrawal by the drawer of the funds or deposits as the benefits from the money he withdrew. HOW COMPUTED: PDIC- the insurance benefits given for deposits is set at Php40,000.00: Formula: Get ratio between PDIC: amount of deposit MULTIPLY RATIO WITH AMOUNT OF CHECK Thus, Loss= PDIC__________ x amount of check Amount of Deposit Loss= extent of drawers discharge

1. 2. 3. 4.

Suppose F, holder of a check for Php10,000.00 drawn by A. A has a deposit with the bank of Php80,000.00. F fails to present the check within reasonable time from issue. During such time, the bank collapsed. Can A go against the bank? No. the fact that A issued a check does not mean that the issuance immediately resulted in an assignment of funds in favor of the payee. There is as yet no privity of contract between F and the bank so that F cannot go against the bank. Can F go against A, drawer? Yes, but only to the extent not considered as lost. PDIC insures the depositor of Php40,000.00. The amount of loss is thus computed:

LOSS= PDIC x amt. of check = 40,000.00 x 10,000.00 Deposit 80,000.00 = x P10,000.00= P5,000.00 The loss being to the extent of P5,000.00. F can only collect P5,000.00 from A. Finally, an unreasonable delay in the presentment of a check will discharge the indorsers whether or not he is prejudiced by the delay as the law presumes that he is prejudiced. Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance.

What is reasonable time? What constitutes reasonable time is dependent upon the circumstances of each case. But the test is whether or not the payee employed such diligence as a prudent man would exercise in his own affairs. As stated earlier, our banking

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What is certification of a check? Certification is an agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment. It is equivalent to acceptance in that the drawee bank is bound on the instrument upon certification. It implies that the bank recognizes that the check is good; that the check is drawn upon sufficient funds in the hands of the drawee; that they have been set apart for its satisfaction; and that they shall be so applied whenever the check is presented for payment. The purpose of procuring certification is to impart strength and credit to the paper by obtaining an acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check will be paid upon presentation. When a check is certified, it ceases to possess the character of a check, and represents so much money on deposit, payable to the holder on demand. Suppose the bank wrote across the check certified and it was signed by an authorized official, is that sufficient certification? Is there a form required? Yes, it is sufficient as no particular form, is required, only that it be in writing. This is the usual method of certification. Another is the use of the word good followed by the bank officers signature. But, ok followed by the signature is not acceptable. If its good its ok. If its ok its not good. What are the effects of certification 1.) It is equivalent to acceptance and is the operative act that makes the drawee bank liable; 2.) It operates as an assignment of the funds of the drawer in the hands of the drawee bank; 3.) If obtained by the holder, it discharges persons secondarily liable thereon; and 4.) The payee or holder for all intents and purposes, becomes the depositor of the drawee bank with rights and duties of one. Supposing the holder of the check presented the check for certification but the bank refused. Can the instrument be considered by the holder as dishonored? No. The certification of the check is not part of the warranties of the drawer. In so far as the drawer is concerned, he only warrants that the check will be paid if it is presented for payment. It is not part of the warranties of the drawer that the check, if presented , will be certified or accepted by the bank. The refusal to certify will not mean a dishonor of the check. What will constitute a dishonor will be the nonpayment of the check because the checks being payable on demand need not be presented for acceptance. Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. NOTE: Where the holder procures the certification, the drawer and endorsers are discharged. The reason for the rule is that certification has the same effect as if the holder had drawn the money redeposited it and taken a certificate of deposit for it. Thus, the drawer (and indorser) is discharged on the check and on the original debt. Further, only indorsers at the time of certification are discharged, not those subsequent. However, if the certification is not obtained by the holder but by other, i.e. the drawer (even at the instance of the holder), or any other person, the drawer and the indorsers are not discharged from liability. Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. What is the rule on checks as regards the funds? Check drawn in the ordinary form is not an assignment of the funds of the drawer in the bank. It does not constitute a transfer of any money to the credit of the holder. It is simply an order by the drawer to pay the amount of the check on presentment, and which may be countermanded and payment forbidden by the drawer at any time before it is actually cashed. The bankers liability to accept and pay is conditioned upon the sufficiency of the drawers money in the hands of the bank. When the holder procures the check to be certified, the check operates as an assignment of a part of the funds to the credit of the drawer with the bank. The funds to be under the control of the drawer and transfer to the credit of the holder or payee. Can the holder sue the bank of the check is not accepted or certified? No. Before acceptance or certification, the bank is not liable and the holder has no right to sue the drawee bank on the check. As a general rule, an action may not be maintained by the payee of the check against the bank on which it is drawn, unless the check has been accepted or certified. Without acceptance or certification there is no privity of contract between the drawee bank and the payee or holder of the check. When may a stop payment order be made? As a check of itself does not operate as a n assignment of funds of the drawer, the latter may - 51 -

ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)


countermand (withdraw the order to pay) payment before its acceptance or certification. The order to stop payment must be communicated to the bank before the check to which it refers has been paid. SUMMARY OF RIGHTS AND LIABILITIES OF THE PARTIES 2. Where the drawee bank refuses to certify, or accept, or pay a check: The holder has no action against it as a check is of itself is not an assignment if the funds of the drawer and the drawee bank is not liable on the check until it has accepted or certified it. Neither has the holder a right of action against the drawer where the drawee bank refuses to accept or certify the check but he has a right of action against the drawer where the drawee bank refuses to pay. While the holder has no right of action against the drawee bank which refuses to pay, accept, or certify the check, the drawer has a right of action against the drawee bank so refusing. "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder; "Person" includes a body of persons, whether incorporated or not; "Value" means valuable consideration; "Written" includes printed, and "writing" includes print. Sec. 192. Persons primarily liable on instrument. - The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable. Sec. 193. Reasonable time, what constitutes. - In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case.

XVII. GENERAL PROVISIONS Sec. 190. Short title. - This Act shall be known as the Negotiable Instruments Law. Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: "Acceptance" means an acceptance completed by delivery or notification; "Action" includes counterclaim and set-off; "Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not; "Bearer" means the person in possession of a bill or note which is payable to bearer; "Bill" means bill of exchange, and "note" means negotiable promissory note; "Delivery" means transfer of possession, actual or constructive, from one person to another; "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; "Indorsement" means an indorsement completed by delivery; "Instrument" means negotiable instrument; Sec. 198. Time when Act takes effect. - This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed. Sec. 194. Time, how computed; when last day falls on holiday. - Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day.

Sec. 195. Application of Act. - The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. Sec. 196. Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent with this Act are hereby repealed.

Enacted: February 3, 1911

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